Tuesday, a subsidiary of Eurohold Group, Euroins Insurance Group, announced a $3.75 bid for Tower Group International Ltd (NASDAQ:TWGP). I think it is bogus. Here’s why:
- At the price they are paying, they are offering more than their net worth to buy Tower Group $215MM vs $190MM.
- They would pay a 2x+ premium over book to buy Tower when they trade at ~70% of book.
- They have no overlapping lines, geographically. It would be cheaper for Eurohold to buy a Bermuda shell and poach some talent, if what they want to do is diversify.
- TWGP isn’t even worth the $2.50 that ACP Re is offering.
- The language in the “offer” is weaker than that of many “letters of intent” I have read, much less a binding offer.
Now, let me take one step back, and say that the numbers I calculated above derive from documents written in Bulgarian that I have translated mechanically. I may have made mistakes.
Also, a fool and his money are soon parted. If Eurohold is foolish, a bid could be made where economics doesn’t matter. After all of my dealings with foreign insurers, I have seen many ill-thought-out deals.
Kudos to the guy who sold near $3 on Tuesday. He got the best outcome out of this sordid mess. Opposite for the one that bought.
As for me, I have no position. I rarely short, and there is no significant margin of safety in owning TWGP. The odds of the operating subsidiaries as a group having not enough surplus to exceed the relevant company action level risk based capital for the group as a whole is not high, but is not zero. That is the one condition that can break the $2.50 deal with ACP Re.
Now let’s see how the first quarter earnings come in. That will say a lot.
As an aside, the bonds of Tower Group offer about as much upside, and less downside than the equity does, if the ACP Re deal is the only real deal.