ACE Limited ACE has inked a deal to buy The Chubb Corporation CB in a 50:50 cash-stock consideration. The transaction is expected to close in the first quarter of 2016 pending approval of both companies’ shareholders, customary regulatory approvals, and other customary closing conditions.
With optimism surrounding the takeover, shares of both ACE Limited and Chubb gained during yesterday’s trading hours as well as in the after-market trading session. ACE Limited added 0.8% in the trading session to close at $102.49 and gained another 0.15% in the after-market hours. On the other hand, Chubb shares surged 26.12% in the trading hours to close at $119.99 and gained another 0.03% after market close.
Upon completion, the combined entity will remain a Swiss company with principal offices in Zurich but will operate under the Chubb banner. ACE shareholders will have control of 70% stake and Chubb will hold the remaining 30%.
The new board will have 18 directors, including the addition of four independent directors from Chubb’s current board.
The Purchase Consideration
The deal, valued at $28.3 billion, consists of $62.93 in cash and 0.6019 share of ACE Limited for each Chubb common share. Based on ACE’s share price on Jun 30, the consideration takes into account Chubb at $124.13 per share. The price also translates into a 30% premium to Chubb’s closing price of $95.14 on Jun 30.
Of the value, $14.3 billion will be in cash while $13.9 billion will be in stock –– to be issued directly to Chubb shareholders.
Financing the Deal
To fund the cash portion of the transaction, ACE Limited intends to utilize $9 billion of ACE and Chubb excess cash and $5.3 billion of senior notes. However, ACE aims a debt-to-total capital ratio of about 20% post acquisition.
Takeover Rationale- Perfectly complementing each other
ACE is one of the world’s largest providers of P&C insurance and reinsurance while Chubb is the one of the largest writers in the U.S., with diverse, profitable operations in commercial and personal lines and several specialty market segments. In the U.S. commercial lines business, ACE serves the upper middle market companies while Chubb is primarily a middle-market commercial, specialty and surety insurer. Outside the U.S., ACE has a presence in 54 countries while Chubb operates in 25 countries.
The combination of the two, with complementary products and services, will position it as #1 on the basis of P&C underwriting income, #2 U.S. public P&C insurer by market capitalization, #2 in U.S. commercial lines by direct written premiums, and the #4 public global multiline insurance company by book value and operating income.
With expanded capabilities, the new entity will enjoy huge diversity and a product mix with narrower exposure to the P&C industry pricing sequence. It will be better poisoned to capitalize on upcoming growth opportunities.
Moreover, the clubbed company’s growth and earnings power will be more than the sum of individual strengths. ACE will have a competitive edge with increased scale, efficiencies and balance sheet size. Put together, these would lead to considerable value creation in the future.
ACE Limited expects the acquisition to be accretive to earnings per share and book value immediately. By the third year, it will be accretive to the bottom line by double digits and will be accretive to return on equity.
Also, ACE Limited estimates pre-tax annual expense savings of about $650 million by the third year of completion. The acquisition will also result in considerable top-line growth by 2020.
Moreover, return on investment is estimated to exceed ACE’s cost of capital within two years and drive double-digit returns by the third year. In addition, tangible book value per share will return to its current level in the third year.
Subsequently, earnings accretion is estimated to be balanced between revenue and expense-related synergies by the fifth year.
The Inorganic Story
ACE Limited has always considered acquisition as an efficient strategy for inorganic growth and global expansion. In 2014, ACE acquired The Siam Commercial Samaggi Insurance PCL a general insurance company in Thailand to strengthen its grip over commercial, auto and personal accident insurance. It is also expanding in Brazil with the buyout of ItauSeguros SA, the P&C insurance unit of ItaúUnibanco S.A., one of the largest private banks in that country. An increasing exposure in Brazil is expected give a boost to the company’s combined large commercial P&C business and help small commercial A&H personal lines and life business. The company also closed the buyout of Fireman’s Fund – a high net worth personal lines insurance business in the U.S. – from German insurer Allianz, positioning itself as a premier high net worth personal lines insurer in the nation.
Zacks Rank
ACE Limited carries a Zacks Rank #4 (Sell) while Chubb carries a Zacks Rank #3 (Hold). With the acquisition expected to be accretive to both companies, we expect analysts to pull up their estimates, exerting an upward pressure on the Zacks Rank.
Insurers Following Suit
Following the organic route, ramping up one’s operational profile seems a well-accepted strategy among insurers as acquisitions rage the insurance space. Exiting June, Willis Group Holdings plc WSH inked a deal to take over the majority stake in Towers Watson TW to create an $18 billion company.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment