Alleghany Stock Surges On Berkshire Hathaway Takeover Offer

Alleghany Takeover offer

At the beginning of March, two insiders took advantage of a price setback to further expand their share position in the US insurance group Alleghany (Y). Less than three weeks later, the share price shot up massively. 

The reason is a takeover offer from Warren Buffett’s investment firm Berkshire Hathaway (BRK.B). The billion-dollar investment is intended to massively expand the insurance business.

The deal is Berkshire’s largest since its acquisition of Precision Castparts in 2016. It’s unlikely to be the last deal, however – after all, Berkshire is sitting on cash holdings of $146.72 billion (as of the end of 2021).

Warren Buffett Puts $11.6 Billion On The Table For Alleghany

This was big news for value investors. Buffett has not made an acquisition for a long time due to the high share prices, but the investment icon is now becoming active again. His significant increase in Occidental Petroleum shares has now been followed by an offer for Alleghany.

Buffett is putting a takeover bid of $11.6 billion on the table for the insurance group. That’s $848.02 dollars per share. The price is around 25% above the closing price before the announcement of the takeover and corresponds to 1.26 times the book value of the company.

Why The Deal Makes Strategic Sense For Buffett

With the transaction, Berkshire Hathaway aims to selectively expand its own insurance portfolio. So far, the investment company already owns the auto insurer Geico and the reinsurer General Re.

Alleghany itself is a company with a long tradition, founded in 1929. Alleghany’s core business is property and casualty reinsurance and insurance, but like Berkshire, it also owns several other businesses. For example, its portfolio includes a steel manufacturer and a toy company. The group also manages an investment portfolio.

Edward Jones analyst Jim Shanahan estimates that these operating units may have been responsible for about one-third of total revenue last year. In 2021, Alleghany generated $12 billion in revenue (+34% vs. 2020). The company ended up with a profit of $1.03 billion on its books.

Alleghany To Remain Independent In Berkshire Hathaway Portfolio

The deal will likely close in the fourth quarter of 2022, at which point Alleghany will operate as an independent unit of Berkshire Hathaway. Yet Buffett knows the company extremely well. 

According to his own statement, the star investor has been following the business for 60 years. In addition, the current Alleghany company boss Joe Brandon previously headed one of Berkshire’s reinsurance companies for seven years.

Bidding War Unlikely

Alleghany now has 25 days to actively solicit and consider alternative takeover bids under a “go-shop” clause. If another buyer offers a higher price for Alleghany, Berkshire could lose the deal.

However, that is not likely to happen. As a rule, Buffett avoids bidding wars and very rarely increases his original offer. In addition, a major shareholder (the Kirby family) has already commented favorably on the takeover bid.

Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.
Dr. Gregor Bauer
Dr. Gregor Bauer
Dr. Gregor Bauer credits his trading success to combining fundamental aspects of a trade with expert technical analysis. A Certified Financial Technician from the International Federation of Technical Analysts (IFTA), he’s rated as one of Germany’s top 300 economic experts.

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