Arch Capital Group Ltd. and Watford Holdings Ltd. announced a revised definitive agreement under which Arch will acquire all of the common shares of Watford for $35.00 per share, in an all-cash offer valued at approximately $700 million.

The deal is a 12.5% increase over Arch’s previous offer of approximately $622 million, or $31.10 per share.

Enstar Group, which owns 9.1% of Watford’s common shares, has abandoned its quest to buy the insurer. Enstar made an offer of $31.00 per share for Watford in early October and another for $34.50 per share several weeks later, or approximately $690 million.

Arch’s latest deal announcement revealed that Enstar has entered into a voting support agreement with Watford and Arch and has committed to vote all of its Watford shares in favor of the transaction.

In May of this year, activist investor Capital Returns Management LLC called for Watford to be sold or put into runoff, complaining about “consistently poor operating and stock performance” in comparison with its peers in the industry. When an initial offer of $31.00 per share was received in early October from Enstar, Ronald D. Bobman, president of New York-based Capital Returns, said, while he was encouraged by the offer, the price was still a significant discount “to the value of Watford’s extremely attractive book.”

When asked to comment on the latest offer of $35 per share from Arch, Bobman simply said in an emailed statement: “Watford’s shareholders owe a debt of gratitude to Enstar.”

The acquisition is expected to close in the first quarter of 2021 and remains subject to customary closing conditions, including regulatory and shareholder approval. As part of the terms of the deal, Arch will assign its interests and obligations under the merger agreement to a newly formed entity of which Arch will own approximately 40%, and funds managed by private equity firms Warburg Pincus LLC and Kelso & Co. will each own approximately 30%.

“We continue to believe in the merits of this compelling opportunity and are pleased to be making this revised offer,” said Marc Grandisson, president and chief executive officer of Arch. “The increased premium and the addition of Warburg Pincus and Kelso as active investment partners will position Watford to capitalize on its significant value generation potential while ensuring continuity of service for all policyholders.”

“This transaction delivers an attractive premium to our shareholders, and offers Watford the opportunity to fulfill its potential as a private company,” said Jon Levy, president and chief executive officer of Watford. “This is a significant milestone for us, both in our pursuit of shareholder value as well as for our strategic growth plans. We look forward to deepening our longtime relationship with Arch, and collaborating with our new partners, Kelso and Warburg Pincus.”

“We were a founding investor in Arch in 2001 and have followed the company’s development closely since our investment. We are excited to partner once again with Arch’s talented management team in a new endeavor,” commented Dan Zilberman, managing director and executive management group member at Warburg Pincus.

“Arch has a compelling plan in place to enable Watford’s continued performance for its policyholders and trading partners. We are excited to participate in this plan, and believe that we can be a value added partner by applying our operating and industry resources to enhance Watford’s inherent value proposition,” Zilberman added.

Chris Collins, managing director of Kelso, said: “We have a successful history of partnering with Arch and are excited to be joining them in the acquisition of Watford. Watford is a strong platform, and we believe that Arch is uniquely qualified to augment its position with its clients and counterparties. We look forward to leveraging our industry expertise and capabilities to support Watford in its next phase of growth.”

The agreement requires approval by holders of a majority of Watford’s outstanding shares. The independent members of Watford’s board of directors have unanimously approved the revised agreement and recommended that Watford’s shareholders vote in favor of the transaction.

Arch owns approximately 13% of Watford’s outstanding shares, and Arch’s directors and executive officers own approximately 2% of Watford’s outstanding shares. In addition, Enstar will support the agreement with its 9.1% shareholding.

Goldman Sachs is acting as financial adviser to Arch, and Cahill Gordon & Reindel LLP is serving as the Company’s legal advisor. Morgan Stanley & Co. LLC is acting as financial advisor to Watford, and Clifford Chance US LLP is serving as Watford’s legal advisor. Wachtell, Lipton, Rosen & Katz is serving as legal advisor to Warburg Pincus and Debevoise & Plimpton LLP is serving as legal advisor to Kelso.

Source: Arch Capital Group

*This story ran previously in our sister publication Insurance Journal.