Enstar Group Limited, the second largest shareholder in Watford Holdings, isn’t at all pleased with the recently announced sale agreement between Watford and Arch Capital Group. In fact, Enstar has written to Watford’s board to express its “strong disappointment” with the latter’s decision.
In the October 15 letter seen by Insurance Business, the global insurance group highlighted the deal’s price tag (US$31.10 per Watford common share) which Enstar believes is “well below” Watford’s fair value. Enstar also offered a rundown of the events that had transpired in the past two weeks, alleging a lack of engagement from the seller’s camp.
“On September 30, Enstar submitted an all-cash bid of US$31.00 per common share for Watford,” wrote Enstar president Paul O’Shea. “This amount was US$5.00 per share higher than the reported offer by Arch of US$26.00 per common share. After several days with no meaningful engagement from the Watford board, Enstar sent a second letter to the board on October 05, indicating that we were prepared to consider a higher bid subject to conducting due diligence on an expedited basis.
“In view of Enstar’s prior price increase of nearly 20% above the initial Arch offer, the board certainly could understand that Enstar was in fact prepared to raise its bid if given the opportunity to conduct diligence. Rather than engage with Enstar, the board, as far as we can tell, rushed to enter into the agreement and plan of merger dated October 09,2020 with Arch, accepting Arch’s bid of US$31.10 per common share.”
O’Shea lamented that Watford did not return to Enstar to explore whether it was prepared to increase its bid above US$31.10 – or even respond to the request for expedited diligence to allow for a raised price.
The president went on to state: “Again, in light of Enstar’s US$5.00 per share increased offer and the clear signal in its second letter, the board’s decision to ignore Enstar and execute the agreement with Arch raises very serious and troubling questions, including whether the board properly discharged its fiduciary duties to act in the best interest of the company.
“To make matters worse, the board executed an agreement that includes a ‘no-shop’ provision without conducting a reasonable pre-signing market check; to the contrary, the board cut off any market check by rushing to prematurely and inexplicably sign an agreement with its controlling shareholder, while refusing to engage with Enstar, another strongly interested bidder.”
Additionally, O’Shea drew attention to the US$18.66 million ‘break-up’ fee that Watford has agreed to pay to its controlling shareholder if the agreement is rightfully terminated by the board for a transaction that is in the best interest of all shareholders and not just Watford’s controlling shareholder.
Counter-offer
“We continue to believe that Watford is worth more than US$31.10 per common share,” asserted the Enstar leader. “Indeed, the public markets seem to be in agreement, with the share price trading above the Arch offer. In light of all the surrounding circumstances, there is serious doubt as to whether the Watford board has adequately discharged its fiduciary duties.”
As previously reported by Insurance Business, the sale is subject to closing conditions including not only regulatory but also shareholder approval. As a Watford shareholder, Enstar said it will not be accepting Arch’s offer.
O’Shea also revealed: “We have retained legal advisors to advise us in connection with next steps, including litigation if it becomes necessary. Our sole interest is to see that shareholder value is maximised.
“Finally, Enstar requests again that the board agree to allow Enstar the ability to conduct expedited diligence. Subject to satisfactory completion of diligence, Enstar is hereby providing a revised indicative, non-binding proposal to acquire 100% of the outstanding common shares of Watford at US$34.50 per share, payable in all cash.”
