Berkley, Chubb, and Ackman declined to comment. Markel and Loews had no immediate comment.
Shares of Alleghany (Y) ended Thursday at $849.54, up 0.5% on the session and above the price of $848.02 that
(BRK.A and BRK.B) agreed to pay in an $11.6 billion all-cash deal. The stock was down 0.2% Friday, at $848.25.
There could be more upside in Alleghany because the Berkshire deal price looks low, at 1.26 times book value, considering Alleghany’s valuable insurance franchise as well as its attractive group of non-insurance business.
If no bidder materializes during the go-shop period, the stock could fall to about $830 a share — a discount to the deal price needed to attract takeover arbitrageurs. Upside could be $1,000 a share if a bidding war for the company develops.
Berkshire CEO Warren Buffett opened the door to potential bidders by not paying a sufficiently high price. Berkshire’s offer was a 26% premium to book value and a similar premium to Alleghany’s stock price on March 18, immediately before the deal announcement the following Monday.
Alleghany’s board didn’t hold an auction for the company, which is questionable corporate governance. Instead, it accepted Buffett’s all-cash offer after what was likely a very short sales process. Alleghany is inviting other bids during a 25-day go-shop period and won’t need to pay Berkshire a breakup fee if it gets a superior bid.
“It was a fair, but not full, price,” says Matthew Carletti, an analyst at JMP Securities. He values Alleghany conservatively at $800 to $900 a share and that it could be worth as much as $1,000 a share.
The deal price looks low for several reasons. For starters, it ranks in the bottom half of property insurance deals over the past six years based on price-to-book ratio, according to the industry publication Insurance Insider, which based its analysis in part on data from S&P Capital IQ.
Alleghany has an above-average insurance franchise, including TransRe, a big reinsurer, and RSUI, a lucrative specialty insurer.
“RSUI is one of the best little insurance operations on the planet,” says Chris Bloomstran, a portfolio manager at Semper Augustus, a St. Louis investment firm.
Alleghany is unusual among midsize insurers because it has valuable non-insurance businesses. They are led by Jazwares, a fast-growing toy company; W&W/Afco Steel, one of the top steel fabricators in the country; and IPS, a leader in designing and constructing clean rooms and other facilities for technology and pharmaceutical companies.
These and other businesses under the Alleghany Capital umbrella could be worth $3 billion, or $1.9 billion above their book value of about $1.1 billion. Carletti thinks the steel business and IPS could each be worth $1 billion. Jazwares, which had a hot toy in Squishmallows at Christmas and saw a doubling in its revenue last year, could be worth $1 billion to as much as $2 billion.
All eight of the Alleghany Capital businesses earned $175 million after taxes net to Alleghany in the 12 months ending in September according to an November shareholder letter from outgoing CEO Weston Hicks, who assembled the companies under his long tenure. He was succeeded by veteran insurance executive Joe Brandon at year-end 2021. Alleghany owns a significant majority stake in those businesses.
Berkshire is paying roughly $2.4 billion above Alleghany’s year-end book value. Strip out the value of Alleghany Capital, and Berkshire could effectively be paying just a $500 million premium for the insurance operations, or less than a 10% premium to book.
The consistently profitable RSUI alone could be worth $3 billion, or about double its book value. Carletti says high-return specialty insurers like RSUI can trade for more than twice book.
An Alleghany buyer could sell off the Alleghany Capital businesses and be left with a valuable insurance franchise at a small premium to book value at a time of two major positive trends. There is a “hardening” market in property and casualty now, with increasing premiums and rising interest rates, which lift investment income.
A buyer could also probably save $25 million or more annually by eliminating the headquarters staff at Alleghany, which is based in Midtown Manhattan. Alleghany is structured as a holding company run out of New York.
So if Alleghany is so appealing, why has its stock languished around book value in recent years?
The company, like others in the industry, has suffered from several years of elevated catastrophe losses from hurricanes and other natural disasters that depressed results. Alleghany earned about $45 a share from operations in 2021, but the consensus is for $74 a share this year and $83 in 2023. The company earned over $18 a share in the fourth quarter, putting it on pace for over $70 a share this year. Berkshire is paying little more than 11 times forward earnings for Alleghany.
Alleghany has also long kept a low public profile, with no quarterly earnings conference calls and scant analyst coverage.
Buffett, however, has been following the company for 60 years and pounced just as the P&C industry is poised for what could be an extended upturn. P&C stocks have been strong lately thanks to expectations of better times. Markel, which is a larger version of Alleghany, is up 20% in recent weeks and hit a new high Thursday.
Investors are looking beyond the hit to insurers’ book value likely in the current quarter from higher rates to better times ahead.
Markel now trades around 1.5 times book, while Berkley fetches more than twice book, giving them currencies to potentially offer Alleghany. Chubb has the equity currency and heft to possibly bid for Alleghany and a CEO in Evan Greenberg, who probably isn’t intimidated by Buffett.
With its enormous financial wherewithal, including nearly $150 billion in cash, Berkshire could outbid any potential buyer of Alleghany. Yet Buffett has a policy of not participating in corporate auctions. Unless he changes his mind, that opens the door to potential bidders for Alleghany.
Buffett could potentially lose Alleghany for not having bid an additional $1 billion for the company—a rounding error for Berkshire.
It’s rare for insurer of Alleghany’s quality to come on the market and it has the added bonus of appealing and high-growth non-insurance operations. Go-shop periods generally don’t result in topping bids. Alleghany could be the exception.
Write to Andrew Bary at firstname.lastname@example.org