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What happened

Shares of Allied World Assurance Co. Holdings, AG. (NYSE: AWH) were up by about 12% as of 12:00 p.m. EST after the company announced that it would merge with Fairfax Financial Holdings (TSX:FFH) in a mostly stock deal.

So what

The terms of the deal call for Allied World shareholders to receive total consideration of $54.00 per Allied World share, with $10.00 paid in cash and $44.00 in Fairfax Financial stock, subject to some conditions. Half of the cash consideration ($5.00) will be paid in the form of a special dividend from Allied World prior to closing.

Fairfax retains the option to increase the amount of cash in the transaction to up to $40 per share, which it may prefer if Fairfax shares rise in value before the deal closes. Given that this is a cross-border transaction (Fairfax is listed in Toronto), currency fluctuations also play a role in the final price tag.

Now what

The market is pricing Allied World Assurance shares as if the deal will go through without a hiccup. Shares of the insurer are trading at a single-digit discount to their implied value if the transaction were closed today, suggesting that investors see little risk that it won't go through and minimal odds that another insurer will make a higher bid for the company.

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