Allied World board members concerned in 2016 with ‘protracted negotiations’ with un-named prospective buyer: SEC filing

Six months before announcing its proposed acquisition by Toronto-based Fairfax Financial Holdings Ltd., commercial insurer Allied World Assurance Company Holdings AG received an offer letter from an un-named prospective buyer for $48 a share, recently-released documents indicate.

Fairfax and Zug, Switzerland-based Allied World announced Dec. 18 that the boards of directors of both firms agreed to a merger agreement valued at about $4.9 billion. The agreement is subject to certain closing conditions, including approval of Allied World shareholders. All figures are in United States dollars.

“Under the terms of the merger agreement, our shareholders will receive a combination of Fairfax subordinate voting shares and cash having a value equal to $54.00 per share,” Allied World said Tuesday in its notice to shareholders of its annual meeting scheduled June 21 in Switzerland.

On May 8, Allied World filed a solicitation/recommendation statement with the U.S. Securities and Exchange Commission. Allied World is traded on the New York Stock Exchange.

In its solicitation/recommendation statement, Allied World noted that in July, 2015, Allied World chairman and CEO Scott Carmilani, “engaged in preliminary discussions with representatives from a third party … regarding the possibility of a strategic business combination transaction involving the two companies.” Allied World refers in its securities filing, to that third party, as “Party 1.”

Allied World has several U.S. offices plus an office in Canada. It provides reinsurance and its commercial primary coverages include, commercial general liability, professional and environmental.

In Canada, Allied World’s coverages include privacy breach, directors and officers, representations and warranty and energy risks. Allied World also participates in the Lloyd’s market through Syndicate 2232.

The unnamed entity known as “Party 1” continued “preliminary discussions” with Carmilani “through early September 2015, at which point the parties determined to cease discussions regarding a potential transaction,” Allied World said May 8.

Then during a conference call June 8, 2016, “Allied World’s board of directors expressed its view that engaging in further discussions with Party 1 regarding the possibility of a strategic business combination may be worthwhile,” Allied World added in its solicitation/recommendation statement filed May 8, 2017.

On July 21, 2016, Party 1 submitted “a non-binding written indication of interest,” or offer letter, that “proposed a taxable transaction at a price of $48.00 per share,” Allied World noted. That offer letter “contemplated a ‘no-shop’ provision with matching rights, a 60-day exclusivity period and a breakup fee equal to 4% of the equity value, among other non-binding terms.”

The following month, “the board of directors of Allied World allowed management to engage in continued negotiations with Party 1, but noted again that as currently constructed, Party 1’s offer was unacceptable and would need to be improved,” Allied World said May 8, 2017 in its securities filing.

Party 1 and Allied World “entered into a 42-day exclusivity agreement” on Aug. 14, 2016, Allied World noted. During that period the companies performed due diligence on one another, Allied World recounted.

In September, 2016, members of Allied World’s board discussed an initial draft merger agreement made by Party 1.

“After a discussion, the board of directors of Allied World instructed management to continue to engage in discussions regarding the principal terms of a potential transaction with Party 1 and to proceed with its due diligence investigation of Party 1,” Allied World reported May 8, 2017.

Related: Benefits of merging Fairfax and Allied World ‘far outweigh’ overlap in reinsurance: Fairfax Insurance COO

During a conference call in September, 2016, managers at Allied World plus representatives of Bank of America Merrill Lynch (which was helping Allied World) “noted that negotiations had been proceeding steadily but there were several hurdles that had yet to be overcome, including certain fundamental issues with regard to valuation considerations,” Allied World noted. Allied World board members discussed several issues “and expressed concern that continued protracted negotiations were causing Allied World’s management to expend valuable time and resources on transaction that may never come to fruition,” the company said in its securities filing. “The board of directors of Allied World also noted that the slow pace of the transaction increased the risk of leaks and competitors potentially poaching Allied World’s key employees.”

On Sept, 22, 2016, “Allied World and Party 1 mutually agreed to terminate discussions regarding a potential business combination over differences in valuation and structure,” Allied World reported.

On Sept. 28, 2016, a senior member of Bank America Merrill Lynch’s deal term “organized an introductory dinner meeting” in Toronto that included Carmilani and Fairfax CEO Prem Watsa, who founded Fairfax in 1985.

On the Sunday before Christmas of 2016, Fairfax and Allied World announced their proposed merger agreement in a press release.

Fairfax will not necessarily own all of Allied World.

In January, the Ontario Municipal Employees Retirement System announced it agreed to invest US$1 billion towards the transaction, “in order to indirectly acquire” about 21% of Allied World’s issued and outstanding shares.

The head of insurance investments strategy for OMERS – Sharon Ludlow – said in January that Allied World has “good diversification” within its portfolio – between insurance and reinsurance, geographically and by product line.

Under the terms of its merger proposal with Allied World Fairfax has the option to fund part of the cash portion by issuing debt or equity or by bringing in partners.

The first partner made public was OMERS, and Fairfax said Jan. 27 it is “ongoing discussions with several additional third parties to participate in the Allied World investment.”

The merger agreement included a “go shop” period – which expired Jan. 18 – in which Allied World and its representatives “actively solicited 31 potentially interested parties,” Allied World said earlier.

If the merger is approved, Fairfax “should benefit from further diversification of its business” A.M. Best Company Inc. suggested in an earlier release.

Fairfax’s insurance subsidiaries include: Toronto-based Northbridge Insurance; Stamford, Conn.-based OdysseyRe; London, England-based Lloyd’s insurance provider Brit PLC; Woodland-Hills, Calif.-based workers’ compensation insurer Zenith National; and Morristown, N.J.-based Crum & Forster.

“Northbridge is a middle market industry focused commercial writer in Canada, one of the largest players in the Canadian commercial market,” Andy Barnard, president and chief operating officer of the Fairfax Insurance Group, said Monday during a conference call in December, 2016.