Buffett ends drought with $11.6 billion purchase of Alleghany

© Reuters. FILE PHOTO: Berkshire Hathaway Chairman Warren Buffett walks through the exhibit hall as shareholders gather to hear from the billionaire investor at Berkshire Hathaway Inc’s annual shareholder meeting in Omaha, Nebraska, US, May 4, 2019. REUTERS/Scott

By Noor Zainab Hussain and Jonathan Stempel

NEW YORK (Reuters) – Berkshire Hathaway (NYSE:) Inc. Warren Buffett signed a deal Monday to buy insurance company Alleghany (NYSE:) Corp for $11.6 billion, just weeks after the 91-year-old billionaire complained about a lack of good investment opportunities.

Alleghany, the owner of reinsurer Transatlantic Holdings, is said to expand Berkshire’s large portfolio of insurers, including auto insurer Geico, reinsurer General Re and a unit that insures against major disasters and unusual risks.

“Berkshire will be the perfect permanent home for Alleghany, a company I’ve been watching closely for 60 years,” Buffett, who has headed Berkshire since 1965, said in a statement.

The acquisition, one of the five largest in Berkshire history, would reunite Buffett with Joseph Brandon, who led General Re from 2001 to 2008 and became Alleghany’s CEO in December.

It would also end Buffett’s six-year drought of major acquisitions and help him deploy some of the $146.7 billion in cash and equivalents his conglomerate had at the end of last year.

In his Feb. 26 annual shareholder letter, Buffett complained that “internal opportunities yield far better returns than acquisitions” and that little “excites” us in the stock markets. He promised to keep $30 billion in cash on hand.

Cathy Seifert, an analyst at CFRA Research in New York, said the merger shouldn’t come as a surprise because Buffett is familiar with Alleghany and Brandon.

“Berkshire is under pressure to make a deal, and this may be the path of least resistance, although Alleghany will be a positive addition,” she said.

“In terms of business model and culture, this fits very well.”

Berkshire agreed to pay $848.02 in cash per Alleghany share, representing a 25% premium over Friday’s closing price. Alleghany would operate as an independent unit of Berkshire, which is based in Omaha, Nebraska.

In morning trading, Alleghany rose 24.7% to $844.15.


The transaction is expected to close in the fourth quarter, pending regulatory approval and Alleghany shareholders’ approval.

Alleghany has a 25-day “go-shop” period to find a better offer. Berkshire is known for refusing to participate in entire company bidding wars.

Insurance typically generates more than 20% of operating profits in Berkshire, whose broader portfolio also includes the BNSF Railroad, Berkshire Hathaway Energy and Dairy Queen ice cream.

Berkshire also invests hundreds of billions of dollars in stocks such as Apple Inc (NASDAQ:) and has invested more than $6.4 billion in Occidental Petroleum Corp (NYSE:) this year.

New York-based Alleghany was founded in 1929 by railroad entrepreneurs Oris and Mantis Van Sweringen and transformed into an insurance and investment company from 1967 to 1992, led by Fred Morgan Kirby (NYSE:) II.

Seifert of CFRA Research said Alleghany has long masqueraded as a “mini-Berkshire,” an insurance conglomerate that redeploys some of its excess capital into other companies.

Buffett’s statement said the companies had “many similarities”, while Brandon said Berkshire is “the embodiment of our long-term management philosophy”.

Other Alleghany businesses include RSUI Group, an underwriter of specialty wholesale insurance, and CapSpecialty, which provides specialist coverage for small and medium-sized businesses.

Alleghany Capital Corp. owns several non-insurance businesses, including companies focused on industrial parts, machine tools, hotels, toys and funeral services.

Goldman Sachs (NYSE:) and the law firm Willkie Farr & Gallagher advised Alleghany on the transaction. The law firm of Munger, Tolles & Olson advised Berkshire.

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