Canada-based Fairfax has made an agreed $1.88bn cash offer for UK-based re/insurer Brit, continuing the recent trend for consolidation in the reinsurance market.
The entire share issue of Brit will be replaced by FGL shares, a wholly-owned unit of Fairfax.
The offer is priced at 280p per share cash, plus the expected 25p final dividend to be announced by Brit with its annual results. Should the final dividend vary from this amount, the total cash offer will vary accordingly.
The offer represents at 20.2% premium to the six-month weighted average share price of 253.8p, and an 11.2% premium to the company's closing price on February 16.
Brit was floated by its private equity backers CVC and Apollo on March 28 last year, at a price of 240p a share.
Brit had net tangible assets of £704.4m on June 30 2014, meaning that the offer is at 1.73x book.
The Brit directors who hold Brit shares – Mark Cloutier, Richard Ward and Hans-Peter Gerhardt, have committed their combined 0.35% holding in the company in favour of the deal. Apollo and CVC, which together own 73.3% of the stock, have also committed to the deal.
Richard Ward said that he believed the combination with Fairfax would "bring us significantly closer to realising our strategy of building the leading global specialty (re)insurer".
Brit chief executive Mark Cloutier said that "our position as a market-leading global specialty insurer and reinsurer, and our major presence in Lloyd's, make us an attractive addition to Fairfax's global footprint".
He noted that there was "very little crossover" in Brit's and Fairfax's international operations, and that this would allow Fairfax "to further diversify its portfolio while enabling Brit to leverage Fairfax's existing relationships and expertise in the international insurance and reinsurance markets".
Fairfax chairman and chief executive Prem Watsa said that the deal would give Fairfax a top-five position at Lloyd's, adding that "we look forward to working with Mark and the entire Brit team to further develop their business over the longer term".
He said that Brit had "an outstanding track record over the last 10 years and will continue to operate on a decentralised basis once owned by Fairfax".
Brit was advised by JPMorgan Cazenove, Numis Securities and Willis Capital Markets.
Apollo and CVC bought Brit in 2010, installing Mark Cloutier as a replacement for Dane Douetil. The re/insurer then sold off its UK regional operation and other non-core businesses, transforming itself into a focused global specialty business operating through its Lloyd's platform.
The primary market accounted for 76% of gross written premiums in 2013, with 66% of that being short-tail specialty. The underwriting is now focused on its dedicated Lloyd's syndicate 2987.
The CVC/Apollo bid in 2010 valued Brit at £850m, since which it has sold its UK retail operation.
PK Paran, Partner, Head of Insurance at DLA Piper for EMEA observed:
"CVC/Apollo's recently announced exit from Brit encapsulates the trend that increasing buyer demand is facilitating PE exits. This follows other high profile PE exists such as Bregal Capital’s successful sale in 2014 of Canopius to Sompo Japan Insurance Inc and wider non-PE, strategic transactions such as the XL/Catlin deal.
"Other insurers are making moves after a significant period of restructuring - Aviva/Friends Life is a great example of this - and consolidation is likely to continue through 2015 and some of the deals may be catalysts that accelerate further M&A activity.
"At the smaller end of the market, regulatory/capital requirements are driving some transactions but I think this is less of a driver for the larger deals which appear to be more driven by commercial and strategic reasons.
"There is still some regulatory uncertainty for the largest players with the possibility of evolving global regulation and capital standards and this may act as a drag on big ticket M&A activity.
"However, industry sources indicate that whilst transformational deals may be unlikely due to the shifting global regulatory landscape, there is now more certainty around Solvency II and a greater appetite to do deals, as large insurers can't hold fire forever when organic growth is slow due to falling premiums in some traditional product lines and markets, combined with low yield and low interest rates on the investment side."