Tuesday, a subsidiary of Eurohold Group, Euroins Insurance Group, announced a $3.75 bid for Tower Group. I think it is bogus. Here’s why:
- At the price they are paying, they are offering more than their net worth to buy Tower Group $215MM vs $190MM.
- They would pay a 2x+ premium over book to buy Tower when they trade at ~70% of book.
- They have no overlapping lines, geographically. It would be cheaper for Eurohold to buy a Bermuda shell and poach some talent, if what they want to do is diversify.
- TWGP isn’t even worth the $2.50 that ACP Re is offering.
- The language in the “offer” is weaker than that of many “letters of intent” I have read, much less a binding offer.
Now, let me take one step back, and say that the numbers I calculated above derive from documents written in Bulgarian that I have translated mechanically. I may have made mistakes.
Also, a fool and his money are soon parted. If Eurohold is foolish, a bid could be made where economics doesn’t matter. After all of my dealings with foreign insurers, I have seen many ill-thought-out deals.
Kudos to the guy who sold near $3 on Tuesday. He got the best outcome out of this sordid mess. Opposite for the one that bought.
As for me, I have no position. I rarely short, and there is no significant margin of safety in owning TWGP. The odds of the operating subsidiaries as a group having not enough surplus to exceed the relevant company action level risk based capital for the group as a whole is not high, but is not zero. That is the one condition that can break the $2.50 deal with ACP Re.
Now let’s see how the first quarter earnings come in. That will say a lot.
As an aside, the bonds of Tower Group offer about as much upside, and less downside than the equity does, if the ACP Re deal is the only real deal.
By David Merkel, CFA of alephblog
