Sompo has announced a plan to buy US insurer Endurance Specialty Holdings for $6.3 billion, joining a raft of Japanese insurers that have turned to overseas markets to boost revenues.
Japan's leading insurance companies have long been forced to look overseas for acquisitions as a way of boosting their tepid domestic revenue base. Just two days ago, for instance, Nippon Life Insurance completed the acquisition of National Australia Bank’s subsidiary MLC Life Insurance for A$2.4 million.
But investors did not have to wait long for the next deal. Sompo, which added a number of M&A experts to its staff last year in a bid to find suitable targets, announced on Tuesday that it wanted to buy US rival Endurance in an all-cash deal.
Sompo offered investors $93 per share on Tuesday, offering a whopping 43% premium to Endurance’s $64.96 closing price on Monday. But the stock jumped hugely before the official announcement, after Japanese newspaper Nikkei revealed the deal.
The deal values Endurance at 17.2 times earnings and comes at a price-to-book ratio of 1.22. Since Sompo trades at around 8.32 times earnings and 0.71 times book, the US company appears to offer Sompo a big earnings boost.
The acquisition will add around 20% to Sompo’s consolidated profits, according to an investor note from Bank of America Merrill Lynch, which also predicted return on equity would jump from 6.8% to more than 8%.
But some analysts have questioned whether Sompo can strike a balance between making investments and returning cash to its own shareholders. Due to goodwill and an increase in business risk, the deal will have a small but negative impact on Sompo’s economic solvency ratio, a measure of capital against risk, according to Bank of America Merrill Lynch.
“Debt should be one major funding tool for this deal,” said analysts at Jefferies in a note. “The company previously said that there’s no big concern about negative impacts on the credit rating if they can maintain a debt-to-equity ratio lower than 20%. A simple calculation implies that the company could raise an additional ¥200 billion without impairing the credit rating.”
Endurance is an insurance and reinsurance company that was founded in Bermuda in 2001. It expanded geographic reach to the US and the UK the following year and went public on the New York Stock Exchange in 2003.
Sompo, founded in Japan in 1888, is one of the three largest insurers in Japan. It operates in 32 countries in Europe, North America, Central and South America, Asia, Middle East and Africa. The company has more than 78,000 employees worldwide.
The acquisition is subject to the approval of Endurance shareholders and the relevant authorities, but the deal is expected to complete by March 2017.
Sompo’s financial advisor is Citigroup and its legal counsel is Shearman & Sterling.
Morgan Stanley will act as financial adviser for Endurance while its legal adviser is Skadden, Arps, Slate, Meagher & Flom.