Warren Buffet’s company Berkshire Hathaway Inc. is acquiring Alleghany Corp. for $11.6 billion in an all-cash deal. Buffet returns to the market for deal-making he had stayed away from in recent years.
As per Bloomberg News, the outstanding shares of Alleghany will be purchased for $848.02 per share. This transaction will be at a 29% premium of the average share price for the last 30 months of the New York-based Insurance Company and a 16% premium on the 52-week high closing price.
Warren Buffet’s entry into the insurance industry
The Alleghany deal will help Buffet deep dive into the world of insurance, the industry that played a crucial role in making Berkshire Hathaway into a $750 billion valued conglomerate.
Berkshire, based out of Omaha, Nebraska, will get a large insurer in the property-casualty segment that has its reinsurance operations run by Transatlantic Holdings Inc. Alleghany is run by the former CEO of General Re, Joseph Brandon.
According to Buffet, Berkshire will be a perfect permanent home for Alleghany. Buffet, the CEO of Berkshire, has been closely monitoring Alleghany for 60 years. This deal is the biggest since 2016 for Berkshire, when it had acquired Precision Castparts Corp. for $ 37.2 billion, as per Bloomberg data.
The purchase of Alleghany will take only 7.9% of the total cash stockpile of Berkshire. Buffet has been using around $150 billion in some high returns assets but has struggled to identify attractive deals because of pricy valuations. He turned to buyback of shares, a decade-long capital deployment method. Early March, he increased his stake in Occidental Petroleum Corp.
In the Alleghany deal, the insurer can scout and solicit other proposals for acquisitions during 25 days “go-shop” period. The transaction of Berkshire has been approved unanimously by the board of both companies and is expected to materialize by the end of the 4th quarter. Jefferson Kirby, Chairman of Alleghany, holds 2.5% of the company shares has lent his support.
Alleghany’s share prices rose by 26% in New York Monday, while Berkshire shares gained 1%.
According to Kylie Towbin and Mathew Palazola, analysts with Bloomberg Intelligence, Buffet will be spending only 8 % of his total cash to acquire Alleghany for $11.6 billion, which is his comfort zone, including Insurance and reinsurance operations.
After the acquisition, Alleghany will continue to operate as an independent entity. Both Berkshire and Alleghany have a history in insurance and railroads. Alleghany was founded in 1929, and Berkshire owns insurance companies such as Gen Re. Alleghany Janson Brandon was the CEO of Berkshire Gen Re before he resigned in 2008.
