Warren Buffett has reduced the amount of Berkshire Hathaway pay to Alleghany by about $ 2, or $ 27 million, in order to increase Alleghany's bank investment investment with Goldman Sachs Group, its long-term bank.
Berkshire Hathaway (tick: BRK. A and BRK. B) on Monday agreed to buy Alleghany (Y), a separate insurance policy, for $ 848.02 in cash, or $ 11.6 billion. The strange price raised eyebrows quickly about how it was achieved.
It has emerged that the contract price of $ 850 a share has been reduced by "financial advisory fees" paid by Alleghany's financial adviser, according to a consolidated document filed late Monday.
It states that the owners of Alleghany "are entitled to $ 848.02, representing $ 850.00 per share under the financial advisory fee due to the financial advisor in connection with the merger."
We are previously reported price reductions in offers. Berkshire Hathaway did not immediately respond to a request for comment.
Buffett thinks little about investment banks, often treating them as high-value insects. Berkshire does not apply them to its deals, including Alleghany.
Charles Frischer, an independent investor and head of shares in Berkshire and Alleghany, says the bank's disclosure reinforces his suspicions that Alleghany has made good money.
Berkshire pays 1.26 times Alleghany's book price for the end of 2021 and the same charge over Alleghany's share price on Friday. The stock rose 24.8% on Monday to $ 844.60, only to be embarrassed by the price of the deal. On Tuesday, the Berkshire stock expanded its recent circle, gaining 1.2%, to $ 531,140, while Alleghany fell 0.3%, to $ 842.
Alleghany traded a book of 1.3 times - almost the price offered to Berkshire - only 1.6% of the time in the last 10 years. Sometimes they trade at a discount to book 1.3 times.
Although Alleghany has traded close to the volume of the book in recent years, it has an excellent insurance business and a growing group of non-insurance businesses under the Alleghany Capital umbrella worth $ 2 billion.
Alleghany's closest peer, the insurance Markel (MKL), trades for about 1.4 times the book value. Barron's wrote well for Alleghany last year, calling it mini Berkshire.
"What was the pressure on the Alleghany board to make this deal?" Frischer tells Barron's. “Did they wait for Buffett to make a promise, and then when he called, they bowed down? The Alleghany situation was very good. "
Alleghany did not immediately respond to a request for comment.
Frischer says that if Alleghany was willing to accept a lower price, he would have to pay at least part of the Berkshire stock so that shareholders could avoid paying higher interest rates.
Buffett must have wanted to know that the price of the party was reduced due to the bank's fee for the language in the document.
In doing so, he has embarrassed Alleghany CEO Joe Brandon and the Kirby family, whose long-term shareholders in Alleghany. Consolidation agreements are less dead.
“What was Alleghany supposed to do? Are you selling a company without representation? ” Asks Frischer. Alleghany could be sued by shareholders if it did not find an investment bank.
Alleghany also appears to have sold the company without asking for any further bids, which is unusual and questionable to manage the company.
To illustrate this, there is a 25-day "purchase" period in which Alleghany can apply for additional offers and if he gets better, the company will not owe Berkshire any split fees.
But it is much harder to find a buyer within 25 days after the agreement is reached than to ask the buyers during the official sale process. Stores usually do not cause high bids. Buffett refuses to participate in business auctions and may not have made Alleghany's promise if the company had auctioned off.
"I think it's Warren's world, but a 25-day period is not enough time to put together a reliable high bid," Frischer said. "Alleghany has been in the public eye for 80 years, and it has been 25 days to get the highest bid."
The deal with Berkshire seems to be coming soon, as Alleghany executives, including CEO Brandon, were buying shares in the open market earlier this month and may not have done so knowingly about a Berkshire bid.
Buffett also embarrassed Goldman (GS) by claiming that his banking services were in vain. Frischer says this may encourage Goldman to redouble his efforts to secure Alleghany's top offer. In addition to Markel, potential buyers include W.R. Berkley (WRB) and Chubb (CB).
Goldman declined to comment.
Chubb is an exciting prospect because it has a market capitalization of $ 90 billion - and the awesome CEO Evan Greenberg may not have backed down from taking Buffett.
Greenberg is the son of another horrible man, Maurice “Hank” Greenberg, former CEO of American International Group. Hank Greenberg was the world's largest insurance officer in his time and a Buffett rival.
Evan Greenberg benefits. As CEO of Ace, he made the purchase of the prestigious $ 28 billion Chubb in 2016 which created one of the world's largest insurance companies.
Alleghany has benefited from better conditions in the real estate and injury insurance market and is expected to earn about $ 75 a share this year and a $ 80 share by 2023. Its book price could be closer to $ 725 shares at the end of the year and $ 800 by the end of 2023. if it were a private company.
Berkshire pays only 11 times the 2022 Alleghany amount and only a small fee is more than the potential end-of-year letter.
It means Berkshire owners think Buffett is getting bigger as Berkshire class A shares rose 2.3% on Monday to $ 525,000 after hitting the record high for the session. The value of the Berkshire market has increased beyond what Alleghany is paying for as investors like Buffett put $ 144 billion in Berkshire cash to operate on an attractive deal.
Alleghany’s book value may suffer a temporary hit this quarter due to the impact of higher rates on its bond portfolio but that is being offset by higher yields on new investments.
“Berkshire is paying a peanuts premium, and Alleghany is treating this like a Champagne deal,” Frischer says.
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Courtesy Grizler.com
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