Nationwide Mutual Insurance Co NMUIC.UL said it will acquire Harleysville Group (HGIC.O) for about $760 million to expand its reach in commercial insurance lines of business and add capacity on the U.S. East Coast.
Nationwide, one of the country’s largest home and auto insurers, will pay $60 a share in cash for the Harleysville shares not already held by its parent, Harleysville Mutual, or about 12.6 million shares in total.
The high price of the deal raised eyebrows within the industry, though. Nationwide is paying a 90 percent premium over Harleysville’s last close, a price equal to about 2.1 times book value — even though the sector median is 0.84 times book, according to Thomson Reuters data.
That would be a premium valuation even at the peak of the cycle for property and casualty insurers, when analysts say they usually trade for about twice their book value.
One person familiar with the situation ascribed the high price to a scarcity premium — in other words, the person said, Harleysville was one of the last large insurers with an independent force of agents, which fits into Nationwide’s expansion plans.
The fact that Harleysville was sold in an auction also helped inflate the price, the person said.
The policyholder members of Harleysville Mutual don’t receive a payment in the transaction, instead they become members of the now larger and financially stronger Nationwide Mutual as a result of the combination.
Closing is expected in early 2012. Harleysville Mutual has committed to voting its about 54 percent stake in favor of the deal, ensuring its approval.
Harleysville shares rose 87.1 percent to close at $58.96 on Thursday.
The Harleysville brand will continue to exist after the deal closes, the companies said in announcing the deal on Thursday.
Harleysville Chief Executive Michael Browne will be president of the Harleysville unit under the combined company.
Browne is also one of the biggest winners in the deal. As of the company’s last proxy filing, Browne owned 2.5 percent of Harleysville Group’s shares, meaning he made a paper profit of at least $18.6 million on Thursday, based on the stock’s one-day gain.
That figure only takes into account shares already owned, though. The proxy said Browne also had vested but unexercised options on 443,005 shares — potentially $12.2 million more if the options had been exercised before the deal.
Browne, a retired Marine officer and former Pennsylvania insurance commissioner, was a practicing attorney for 21 years before becoming CEO in February 2004.
Harleysville, which dates to a small-town auto theft association founded in 1915, operates in 32 states. Some 80 percent of its business is in commercial lines.
Nationwide Mutual Chief Financial Officer Mark Thresher said Harleysville would let his company expand its distribution in the northeastern and mid-Atlantic states, and further its intent of diversifying its exposure.
Thresher said those diversification efforts will continue, though the Harleysville deal helps accomplish a large part of the goal.
“It’s a good step, I’m not sure it’s full but I’m also not sure there’s another step tomorrow,” he said in an interview.
Bank of America Merrill Lynch and Jones Day advised Nationwide, while Credit Suisse advised Harleysville Mutual and KBW advised Harleysville Group.
(Reporting by Ben Berkowitz and Paritosh Bansal in New York; editing by John Wallace, Dave Zimmerman and Carol Bishopric)
Thu Sep 29, 2011 4:49pm EDT