Chubb (CB) Would Make an Attractive Target for Buffett's Berkshire - Analyst
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Rating Summary:
10 Buy, 20 Hold, 1 Sell
Rating Trend:
Down
Today's Overall Ratings:
Up: 11 | Down: 18 | New: 17
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Chubb Corporation (NYSE: CB) would make an attractive takeover target for Warren Buffett's Berkshire Hathaway (NYSE: BRK-a) (NYSE: BRK-b), according to Barclay's insurance analyst Jay Gelb.
In a note to clients Tuesday, Gelb said a deal makes sense from both a strategic and a financial perspective.
Chubb "would add a strong presence in primary commercial P&C and high-end personal lines insurance that does not overlap with BRK's existing insurance businesses," the analyst said. In addition, a deal "could also provide Berkshire a
top-tier P&C insurer with approximately $27bn of cost-free float for investments that would deploy Berkshire’s free cash with a reasonable earnings yield." A deal would also provide an attractive EPS accretion for Berkshire in an all-cash deal because CB would provide an earnings yield vs essentially no return earned by Berkshire on its cash.
For Chubb, a deal could address CB's upcoming CEO succession issue as there is a mandatory retirement for its CEO at year-end 2014.
The largest impediment to a potential deal is valuation, the analyst said. "CB currently trades at 1.24x book value," he notes. " As a point of reference, CB's historical valuation range is 2.2x-1.0x and we suspect CB shareholders would not be satisfied unless their exit value is toward the upper end of this range."
The analyst also noted that at Berkshire's annual shareholder meeting in May CEO Warren Buffett stated that by YE12 Berkshire could have the capacity to complete a $30bn cash acquisition. In May, Mr. Buffett also stated that Berkshire is interested in expanding in primary commercial P&C insurance, although there are few companies it would be interested in acquiring. His focus for P&C acquisition candidates is on quality companies with quality management. "We believe CB fits these criteria as well as being large enough to be meaningful to Berkshire’s $13bn of annual earnings power. Other examples of high-quality P&C insurers such as ACE (NYSE: ACE) and TRV (NYSE: TRV) appear too large for Berkshire, while XL (NYSE: XL) and ACGL (Nasdaq: ACGL) appear too small."
In a note to clients Tuesday, Gelb said a deal makes sense from both a strategic and a financial perspective.
Chubb "would add a strong presence in primary commercial P&C and high-end personal lines insurance that does not overlap with BRK's existing insurance businesses," the analyst said. In addition, a deal "could also provide Berkshire a
top-tier P&C insurer with approximately $27bn of cost-free float for investments that would deploy Berkshire’s free cash with a reasonable earnings yield." A deal would also provide an attractive EPS accretion for Berkshire in an all-cash deal because CB would provide an earnings yield vs essentially no return earned by Berkshire on its cash.
For Chubb, a deal could address CB's upcoming CEO succession issue as there is a mandatory retirement for its CEO at year-end 2014.
The largest impediment to a potential deal is valuation, the analyst said. "CB currently trades at 1.24x book value," he notes. " As a point of reference, CB's historical valuation range is 2.2x-1.0x and we suspect CB shareholders would not be satisfied unless their exit value is toward the upper end of this range."
The analyst also noted that at Berkshire's annual shareholder meeting in May CEO Warren Buffett stated that by YE12 Berkshire could have the capacity to complete a $30bn cash acquisition. In May, Mr. Buffett also stated that Berkshire is interested in expanding in primary commercial P&C insurance, although there are few companies it would be interested in acquiring. His focus for P&C acquisition candidates is on quality companies with quality management. "We believe CB fits these criteria as well as being large enough to be meaningful to Berkshire’s $13bn of annual earnings power. Other examples of high-quality P&C insurers such as ACE (NYSE: ACE) and TRV (NYSE: TRV) appear too large for Berkshire, while XL (NYSE: XL) and ACGL (Nasdaq: ACGL) appear too small."
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