Will This Deal Sink Markel?

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It would appear that something went terribly wrong at Markel (NYSE: MKL  ) today as the stock fell as much as 10% so far in today's trading.

The driver of the plunge was the announced acquisition of Alterra Capital  (UNKNOWN: ALTE.DL2  ) for roughly $3.1 billion. Markel -- which is often tagged a "baby Berkshire" because of similarities with Warren Buffett's Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) -- is diversifying its book of business with the deal, as Alterra focuses on the reinsurance market. In fact, the deal probably makes Markel look even more like Berkshire since Buffett's conglomerate has a significant reinsurance practice.

To some extent, the market's negative reaction may be driven by the potentially dilutive nature of the deal -- it's a combo cash and stock deal, which means that Markel will be issuing new shares. A frosty reception from Wall Street analysts may be playing into the drop as well. Bloomberg spoke to Stifel Financial's (NYSE: SF  ) Meyer Shields, who said:

Our initial reaction to the deal is negative. We have enormous respect for Markel's underwriting and investing expertise, but we think its [merger and acquisition] track record is frankly less impressive.

I'm not as convinced that long-term Markel shareholders should be concerned. The company is paying a modest premium on tangible book value to buy Alterra, which is still a serious discount to how the market values Markel. It's also diversifying its business which, if it makes sure that Alterra can match Markel's underwriting quality, could lead to better, more stable earnings. And given Markel's success not only on the insurance side of its business, but also on the investing side, I'm apt to give it the benefit of the doubt when it comes to making valuable purchases. 

That said, this isn't an open-and-shut case of market overreaction. Questions that should be on the forefront of investors minds as they look over this deal include:

  • If Markel is using stock to pay for part of this deal, what does that say about its view of its own stock's valuation?
  • Has growing through acquisition truly been a value-destroying strategy at Markel?
  • Do the quality and results at Alterra provide confidence that this will integrate well and be a long-term contributor to Markel's business?

Markel's stock -- not unlike that of its larger model, Berkshire -- doesn't swing like this all that often. For investors that are comfortable with this deal and have had Markel on their radars, this could be a pretty sweet buying opportunity.

Of course, Markel may be small and mighty, but there's nothing quite like the original Berkshire. Is it possible that the giant Berkshire is a buy today? To help investors, The Fool's resident Berkshire Hathaway expert Joe Magyer has created this premium research report on the company. Inside you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.

Read/Post Comments (4) | Recommend This Article (8)

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  • Report this Comment On December 19, 2012, at 3:24 PM, CentreCat wrote:

    If you want to draw a parallel between Markel and Berkshire Hathaway with regard to the Alterra transaction, recall how successful the latter's acquisition of General Re was for quite a long time. I'm sure if Buffett had the choice he'd wouldn't do that deal (which was far and away its biggest up to that time) again in a heartbeat.

    In addition, I don't know why Markel would purchase Alterra primarily to get into the reinsurance business. Alterra's reinsurance business was largely obtained when it acquired Harbor Point, which was the old Chubb Re run by the superb reinsurance executive John Berger, who left Alterra after the merger several years ago. Alterra is as much an insurance company as it is a reinsurer, and I certainly wouldn't consider it a major player in the later market.

    IMO, the BIG winner from this transaction is Chubb, which is Alterra's largest equity holder. This deal provides a great way for it to exit its holding at a nice gain.

  • Report this Comment On December 19, 2012, at 5:50 PM, TMFPennyWise wrote:

    Matt, thanks for your timely overview and CentreCat, you have some interesting comments.

    I don't have the love affair with Markel that others seem to have around here. And I too wonder about the benefit of acquiring the Alterra re-insurance angle.

    Maybe Markel wanted Alterra for its international geographic presence. Recently it seems like more domestic specialty insurers are looking to Europe, Australia and Asia for new business.

  • Report this Comment On December 19, 2012, at 6:52 PM, Camacam wrote:

    Matt, thanks for this timely reporting. It would have been even better if "modest premium on tangible book value " had been quantified.

    In general I find MF analysis is light on quantifying its judgments. In an industry that relies on numbers to a great extent, MF analysis is too verbal in its analysis.

  • Report this Comment On December 20, 2012, at 1:20 AM, TMFKopp wrote:


    Based on the $31/share deal value, it's about a 7% premium on ALTE's 9/30 tangible book. Markel (post deal announcement) trades at about 1.5x TBV.

    Hope that helps!


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