Berkshire’s $11.6B Alleghany deal expands insurance business

Warren Buffett, who started the year bemoaning the lack of potential acquisitions for his conglomerate, Berkshire Hathaway, announced Monday that it would acquire the insurance company Alleghany for $11.6 billion.

The scarcity of investment targets over the past several years turned into a cash pile of $146.7 billion at Berkshire by the end of 2021, but the company appears to have found a suitable place for some of that cash in recent days.

The Omaha, Nebraska, company revealed last week that it had compiled a 14.6% stake in Occidental Petroleum, snapping up an additional $1 billion worth of shares just between Monday and Wednesday. That was on top of the more than $6 billion Berkshire spent acquiring shares of the oil producer over the past month.

The all-cash acquisition of Alleghany will expand Berkshire’s already considerable insurance holdings, including brands like Geico auto insurance.

“Berkshire will be the perfect permanent home for Alleghany, a company that I have closely observed for 60 years,” Buffett said in a prepared statement Monday. “Throughout 85 years the Kirby family has created a business that has many similarities to Berkshire Hathaway.”

Alleghany’s core businesses are in property and casualty reinsurance and insurance, but like Berkshire, it also owns several other businesses, including a steel fabricator and a toy company, and manages an investment portfolio. Edward Jones analyst Jim Shanahan said nearly one-third of Alleghany’s revenue came from those operating companies and its investments last year.

“This is a highly complimentary and very similar franchise,” Shanahan said. “I’m really pleased to see Berkshire putting capital to work in the market.”

Berkshire will pay $848.02 in cash for each outstanding share of Alleghany Corp., the company said Monday.

“Berkshire Hathaway’s support, resources, and expertise will provide added benefits and opportunities for Alleghany and its operating businesses for many years to come.” Alleghany Chair Jefferson Kirby said.

CFRA Research analyst Cathy Seifert said this deal makes sense for both companies because it will provide Alleghany access to Berkshire’s massive capital reserves while expanding insurance and reinsurance operations at Buffett’s company at time when the growth prospects for those companies are good.

Alleghany, based in New York City, will operate as an independent subsidiary of Berkshire Hathaway after the transaction’s closing. It has 25 days to actively solicit and consider alternative acquisition proposals under a “go-shop” provision. If another suitor does offer a higher price for Alleghany, Berkshire could lose out on the deal because Buffett avoids bidding wars and rarely increases what he offers for acquisitions.

The analysts said it likely helped this deal come together that Buffett is familiar Alleghany’s CEO, Joe Brandon, who previously led one of Berkshire’s reinsurance companies for seven years.

The deal announcement comes after Buffett said last month in his annual letter to company investors that he was having difficulty finding worthwhile acquisitions at prices he likes with the valuations on companies soaring.

Yet Berkshire has made sizeable investments in Occidental since late February just as the price of oil began to spike, bringing along the shares of oil producers with it. Benchmark U.S. crude had jumped more than 40% this year with its rise accelerated by Russia’s invasion of Ukraine.

Shares of Occidental have jumped nearly 150% in the same period. That price increase has brought Occidental shares to a point just over where Berkshire holds warrants to buy another 83.9 million shares for just over $59.62 apiece. Berkshire picked up those warrants when it agreed to help finance Occidental’s acquisition of Anadarko

The boards of both Allegheny and Berkshire have approved the deal and it’s expected to close in the fourth quarter. It still needs approval from Alleghany shareholders.

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Chapman reported from New York and Funk contributed to the story from Omaha, Nebraska.

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