Berkshire Hathaway didn’t require Alleghany to pay any breakup fee in the event another potential acquirer topped an $11.6 billion deal price that Warren Buffett offered to CEO Joseph Brandon in early March—”after some casual conversation” at a dinner meeting.

Reports of the March 7 dinner meeting, and of what the Alleghany Corporation board characterized as Buffett’s “highly unusual” move to exclude a termination fee, are set forth in a proxy statement that was filed on April 11.

“The Board discussed that the absence of a termination fee was highly unusual and favorable to the Company because termination fees made it more expensive for alternative [acquirers] and could discourage bidders from submitting proposals during a ‘go-shop’ period or thereafter during the ‘no-shop’ period,” the filing says, revealing what went on during a March 17 videoconference at which board members weighed the pros and cons of selling to Berkshire.

The St. Patrick’s Day videoconference was the third one held after Buffett and Brandon met over dinner in New York. Three days later, on March 20, Berkshire and Alleghany executed the merger agreement and they jointly announced it to the world in a press release the following day.

Behind the scenes, Goldman Sachs, Alleghany’s financial adviser, did, in fact, go shopping. The financial firm started reaching out to 23 potential strategic bidders and eight potential financial sponsor bidders on March 21, according to the filing.

The go-shop period ended at 11:59 p.m. (New York time) on April 14.

Besides the breakup fee, also absent from Buffett’s deal proposal was need for any due diligence. Instead, he said his offer “would be subject to both parties moving quickly to negotiate and announce a transaction,” during that first dinner meeting with Brandon and a subsequent meeting with Brandon and Alleghany Chair Jefferson W. Kirby in Omaha, Neb., on March 12.

Buffett made his case for a quick cash deal of $850 per share of common stock, “after some casual conversation at the March 7 dinner meeting” and again in Nebraska less than a week later, noting that there was no need for Berkshire to get any third-party financing to move forward.

The $850 price per share would be reduced for the fee payable to Alleghany’s financial adviser, which turned out to be $1.98 per share, putting the final price at $848.02.

The filing doesn’t reveal much debate over the deal price, although it does note that Kirby asked Buffett to up the price once, after Brandon had exited the March 12 meeting. Kirby proposed that Buffett should either raise the $850 price per share or eliminate the deduction for the fee payable to Goldman Sachs.

Buffett rejected any change to his original offer.

Other back-and-forth proposals came from the legal representatives on both sides—Willkie Farr & Gallagher LLP for Alleghany and Munger, Tolles and Olson LLP for Berkshire—with Willkie proposing a 35-day go-shop period instead of a 25-day period. Willkie also proposed to eliminate Buffett’s ability to match a competing offer and advanced some proposals about a reverse termination fee and time frames related to hiccups in regulatory approvals. The 25-day go-shop period and the right for Buffett to match a superior proposal were ultimately agreed.

What attracted Buffett to make an offer to Alleghany in the first place?

While it is known that Brandon previously worked with Buffett as chair and chief executive officer of Berkshire’s subsidiary General Re Corporation, and while Buffett’s annual reports often refer to his quests for “elephant”-sized acquisition targets, the April 11 filing gives only a brief reference to how or why the dinner meeting came about:

“Mr. Brandon…sent Mr. Buffett a copy of the annual letter to [Alleghany’s] stockholders, which accompanied the Company’s annual report, as the Company had done from time to time in prior years. Following receipt of the annual letter from Mr. Brandon, on February 25, 2022, Mr. Buffett suggested that they get together in New York or Nebraska.”

The filing does not explain why Alleghany sent Buffett a copy of the annual letter in prior years. The section detailing the background of the merger, however, does begin with a typical disclosure noting that Alleghany’s board and senior management team regularly review and assess potential opportunities for business combinations, acquisitions, dispositions, and other financial and strategic alternatives as part of their ongoing evaluation of the company’s operations and the business environment. “Over the past few years, the Board has evaluated, and senior management has had conversations with third parties regarding, a disposition, spin-off and/or initial public offering of each of the Company’s Transatlantic Holdings, Inc., RSUI Group, Inc. and CapSpecialty, Inc. businesses,” the filing says, referring to the insurance and reinsurance operating subsidiaries.

After receiving Buffett’s offer, Alleghany’s board and management teams still had to consider potential alternatives to the status quo or a deal with Berkshire, weighing the possible values and execution risks involved with selling or spinning out individual businesses. One risk the board considered after Goldman Sachs reviewed these options during the March 17 videoconference was the risk that Buffett would pull his offer if Alleghany contacted other potential acquirers.

That risk was brought to light by “Buffett’s past statements that Berkshire avoids auction processes and Berkshire’s track record of not participating in auctions,” the filing said, also referring to “the risk of a leak” from outreach to other suitors “and the impact of such a leak on the process for signing of a definitive agreement.”

Deciding that the risks outweighed the potential benefits of contacting other potential acquirers prior to signing the merger agreement, Alleghany waited to solicit and consider superior proposals from alternative acquirers until after the merger announcement—with no worries about having to pay Berkshire a termination fee if better deals showed up.

Deal Valuation

Setting out the reasons why the board “unanimously recommends that the stockholders of the Company vote ‘FOR’ the proposal to approve and adopt the merger agreement and the merger,” the list starts with the deal value. Here, the filing notes that the $848.02-per-share offer is 25.3 percent higher than the closing price of Alleghany common stock on March 18, 2022 (the last trading day prior to the board’s approval of the merger agreement), and 29 percent above the volume-weighted average closing share price of Alleghany common stock during the 30 days prior to the board’s approval of the merger agreement.

In addition, the resulting valuation is 1.26-times Alleghany’s book value at Dec. 31, 2021, the filing says.

Among the other reasons listed are these:

• Berkshire is paying cash, “which provides certainty of value and liquidity” to Alleghany stockholders immediately upon closing, “especially when viewed against the risks and uncertainties inherent in the Company’s businesses, including long-term business and execution risks and uncertainty in global economic conditions.”
• Berkshire stockholders don’t have to approve the deal.
• Berkshire has a successful track record of acquiring other companies, and the financial wherewithal to do the deal without any financing conditions.

The section of the proxy filing presenting Goldman Sachs analysis of the fairness of the deal price sets out more price comparables and discloses the methods used to assess the fairness. For example, the disclosure reveals that the $848.02 per-share offer is 38.8 percent higher than the price at which Alleghany was trading on the day of the Buffett-Brandon dinner.

The deal price falls within the ranges calculated by Goldman for most of the methods of analysis described, including a “dividend discount analysis” with implied values of $599-$807 per share. It is above the range of a “present value of future share price analysis” which gives implied values of $567-$791 per share.

Another analysis involves comparing the 1.26-times price-to-book value multiple of the Alleghany deal to multiples for several property/casualty insurance and reinsurance deals announced since 2014. Eleven such deals are listed with price-to-book multiples ranging from 1.02-times (Renaissance Re’s acquisition of Tokio Millenium Re) to 1.57-times (AIG’s deal for Validus Holdings).

Goldman Sachs narrows the reference range for its analysis down to one that extends from 1.12-times to 1.36-times, corresponding to the 25th- and 75th-percentile ratios. The resulting range of implied values is $756-$914 per share.

According to a list shown in the filing, deals with price-to-book multiples higher than Berkshire’s deal include SOMPO Holdings’ deal for Endurance Specialty announced in 2016 (1.36-times) and AXA’s deal for XL Group (1.51-times) among others. On the other end, Apollo Global Management’s deal for Aspen Insurance Holdings (1.12-times) and RenRe’s deal for Platinum Underwriting Holdings (1.13-times) had lower multiples, according to information in the filing.