Friday, 9 January 2015

Acquisition of Catlin Group by XL Group

I have now been investing in individual companies for over a year. However, as yet I have not seen any one of my portfolio become the subject of a merger or acquisition. My virginity now appears to be on the way to being broken in this regard.

Back in August I picked up 100 shares in the international reinsurer Catlin Group. Since then--thanks to a nice reinvested interim dividend payment--I have grown this to a holding of 102 shares.

Since December however the company has been subject to a potential acquisition by its larger New York listed rival, XL Group. Today they provided the prospectus of the acquisition which they hope to have confirmed by Catlin's shareholders early this year and finalised sometime round mid-2015.

But what does the deal mean for my holding? I am going to take a moment to work it out.

388p per share in cash

Pretty self-explanatory is the first element: a plain old cash return for the Caltin shares. According to XL they propose a 388p per share cash return. On my 102 share holding this would provide me with £395.76.

0.13 shares of XL for each Catlin share

Further to the cash payment XL's acquisition would also include a provision of 0.13 shares in XL for each Catlin share held. 

This would mean that I would see 13.26 XL shares coming my way. Assuming a whole number of 13 and at a price of (on 8 January) $35.42 would provide a new holding with a value of about $460.46.

On a current USD/GBP exchange rate of 0.66 this would be worth about £303.90.

22p per share final dividend

They also state their intention for the Catlin final dividend (anticipated to be 22p per share) to go ahead in March. This would throw out an additional £22.44.

12p Special Dividend?

What is more, the prospectus suggests that there may be a further 12p special dividend related to the sale of Catlin’s investment in Box Innovation Group. Again this is currently anticipated to potentially be returned to Caltin investors before the acquisition. This would represent a further £12.24.

What return does this represent?

Overall this would mean that the acquisition would result in me having about £722.10 (not including the potential special dividend) returned in one form or another. Considering that my original investment five months ago of £532.76 this represents a return of about 35%. Not bad.

Some food for thought

Of course, this has not yet been finalised and may fall through. However, it does seem unlikely at this stage. The acquisition does leave me with a few questions, for example:

  • What should I do with my XL Group shares?
  • Should I reinvest in another reinsurer?
With regards to the first question. I am unsure what to do with the XL shares. The likelihood is that I will continue to hold them if possible. Even if only for the short term. I will, however, have to do more research into this when the deal comes closer to being finalised. 

However, XL do seem to have a lower yield and less consistent dividend performance than Catlin. As a result, it is quite possible that I will sooner rather than later shed the shares.

So what about the second? Should I find a new target in the sector? I do like the reinsurance market. Currently I also hold the--slightly unorthodox--reinsurer Lancashire in addition to Catlin. However, potentially I will initiate a holding in Amlin.

When I originally picked up my shares in Catlin I did note that it was a close run thing between Catlin and Amlin. Both companies are very similar. A similar yield (though, post acquisition rumours price jump at Catlin have changed this), market cap and business all suggest this is a logical move.

Alternatively, I may move into the more conventional insurance market through the likes of Legal & General or Old Mutual. We will see.

All in all, this is an exciting development. Let's see how it unfolds!

Are you a Catlin shareholder? Are you planning to keep the XL shares after any potential acquisition?

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