Thursday, 16 April 2015

Cash-in on Catlin: My Decision on the XL Group acquisition of Catlin

The decision has been made.

For those of you who have been following this blog for a while you will know that one of my holdings has recently been acquired. This is the FTSE 250 specialty insurer, Catlin, who is being bought out by XL Group.

I first bought into Catlin back in August 2014. It was my first specialty insurer but by no means my last. I now have Lancashire and Amlin in my portfolio and expect to find more in there sometime in the future.

But not only was Catlin my first specialty insurer. It is also my first experience of being a shareholder in an acquired firm. It has, therefore, been an investing education in several ways.

However, now is the time for me to make the final moves with the company.

Choices, Choices, Choices

My broker sent me details on the acquisition and how it can be executed in my case earlier this week. I had to wait a while before I got the time to properly review my choices.

Here were the options:
  1. Basic option. This was a mix of cash and shares originally proposed. The details of this I outlined in a post back in January.
  2. Mix and match option. Here you could adjust the amount of cash or shares you receive as opposed to the plain option above.
  3. Full cash option. This is fairly self-explanatory. Instead of a cash and share payment you get it all in cash.
So what did I decide to do? In the end I went for the third option of full cash payment (much as FFB40 has done).

Why? Good question.

Reasons for My Decision

I was very much tempted by the idea of retaining XL Group's shares after the purchase was completed (a la the basic option). However, several reasons made me think twice in the end:
  1. XL Group is listed in New York adding a little complication and extra costs involved in holding them.
  2. The yield is currently below 2%. However, it is very well covered. 
  3. I can get better specialty insurers in the UK market. They offer similar P/E ratios, better yields and equally solid balance books.
Overall, it was the first point which was the clincher. The third point merely helped secure the choice.

The added benefit of the cash option is that I should receive the cash early in May 2015. This is just before the election and hopefully the uncertainty surrounding its result will see a couple of companies nicely depressed in price. As such, this pleasant windfall will hopefully be rather timely!

But what exactly is the value of this windfall? Let's take a look.

Giving a Number

The basic option involved giving each Catlin shareholder:
  • 388p per share in cash;
  • 0.130 new XL Group shares.
However, the option I have chosen will mean that the second part of this entitlement--the 0.13 new XL shares--can be swapped for an additional 323p per share in cash.

In other words, 711p in cash for every Catlin share. Not bad.

As it stands I have 105 shares in Catlin thanks to my original investment and the reinvestment of subsequent dividends.* This means I will be receiving £746.55 in total after the deal is finalised (note this is higher, thanks to various reasons, than the original deal suggested).

Now, all told I have invested £554.34 in Catlin. This means I have seen a capital return on investment (ROI) of about 35% on my 8 month investment. 

But that is not all. 

In that time I have received a pretty hefty £45.23 in dividends. This boosts my total return on investment to £791.78. This means I have had a total return of about 43%.

That is excellent by any measure.


I'll be honest. I will be sad to see it go for many reasons. Partially it is because it was an early foray into a sector I admire greatly. Partially because it gave me my first opportunity to taste some M&A activity myself.

However, most of all I will miss it because it was an excellent and well-managed company which I greatly admired. It had a magnificently sound set of fundamentals, a clear and consistent business structure and a high-yielding and consistent dividend history.

Nonetheless, for a £250 profit in 8 months on a £550 investment I have plenty of additional capital to invest to distract me!

What did you do?

Anyone else a (soon to be former) Catlin shareholder? What option did you go for? Where do you plan to invest your fresh capital?


* This may be more before the actual deal is finalised as Catlin are paying an additional special dividend in late April. This may see me adding another share to the tally. I am trying to work out the best way of halting this particular dividend reinvestment as it is pretty pointless. Let's hope I succeed.

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  1. Thanks for laying this all out so clearly. These things can be a bit confusing sometimes, especially with various options and a mix of cash and shares in some company or other you might never have heard of!

    Cash is what I would have chosen as well for the simple reason that I like to pick my investments rather than ending up owning whichever company happens to take over one of my existing holdings.


    1. Thanks, John. I know what you mean. I decided to wait until I got the time to sit down and properly think about it with all the facts in front of me. Especially as this was the first time I have had to make this sort of decision.

      Yes, as I pointed out on the FFB40 post mentioned above: "The clincher was "Would I buy XL if the deal was not on the table?". The answer being "no" it is rather simple really!"

      I now have to have a ponder on where the cash should go. With the post-exdividend drop today, Amlin looks very attractive. However, I am looking to push it into another sector if possible. Balance things out a bit!

      You have any ideas where your cash may be heading when it arrives?