Bermuda-based insurer and reinsurer, Arch Capital Group Ltd., has entered into a definitive agreement to acquire all the common shares of total return reinsurer, Watford Holdings Ltd., in an all-cash transaction valued at roughly $622 million.
The deal is expected to close in the first-quarter of next year, following which, Watford will continue to operate as a standalone business and remain consolidated within Arch’s financials.
The news comes days after it was reported that Enstar Group Limited had asked Watford to enter into a non-disclosure agreement to let it begin due diligence on a potential acquisition.
This came after Enstar delivered a letter to the Board of Directors of Watford Re indicating its desire to acquire all of the company’s outstanding shares.
But despite the approach from Enstar, it appears that reports from early September of a potential acquisition of Watford by Arch, have come to fruition.
Under the terms of the agreement, Watford’s shareholders are set to receive $31.30 in cash for each Watford common share they hold. This represents a premium of around 74% of Watford’s unaffected closing common share price on September 8th, 2020, which was the last trading day prior to reports in the press about the potential for a deal.
An announcement on the transaction also notes that Watford’s 8.5% cumulative redeemable preference shares will remain outstanding, and will be entitled to the same dividend and other rights and preferences as are now provided to the preference shares.
The offer from Enstar, which currently holds a 9.1% stake in Watford after recently increasing its share from the 5% acquired in Q1 2020, was $31 per share, so slightly less than the price that Arch has agreed to pay for the firm.
Arch’s offer of $31.30 per share is a significant improvement on its initial bid, which, according to reports, was around $26 per share.
The agreement has been unanimously approved by the independent members of Watford’s Board of Directors, who have also recommended that shareholders vote in favour of the deal. The transaction also needs to be approved by holders of the majority of Watford’s outstanding shares.
Arch currently owns a 13% stake in Watford and has committed to vote in favour of the deal. Furthermore, Arch’s directors and executive officers own roughly 2% of Watford’s outstanding shares.
Jon Levy, Watford’s President and Chief Executive Officer (CEO), commented: “This represents a clear path forward for Watford, while also delivering an attractive premium to shareholders in a transaction with a high degree of certainty to close.
“We believe that Watford will be better positioned as a standalone business within Arch to execute its strategic priorities and growth plans. Importantly, we expect a seamless transition for our clients, trading partners and policyholders, who we think will benefit from Watford becoming part of a larger organization with greater resources.”
Marc Grandisson, President and CEO of Arch, added: “Since we launched Watford in 2014, the company has been a valued part of the Arch story and we are pleased to deepen our existing strategic and financial investment.
“Our longstanding contractual partnership with and financial consolidation of Watford expedited the due diligence process and should give all stakeholders confidence in our ability to close this transaction quickly. Watford’s policyholders and trading partners will benefit from the continued underwriting strength and service they have come to expect from Watford and Arch.”
The $622 million deal will be funded via cash from Arch’s balance sheet, and remains subject to customary closing conditions, including shareholder and regulatory approvals. Additionally, Arch can bring in additional investors as co-investors in the deal.