Amtrust launches attempt to win over investors in go-private deal
AmTrust Financial Services is trying to persuade investors opposing the deal to take the insurer private in a May 22 presentation, stressing the attractive offer price for the shares which if accepted frees shareholders from significant risks reflected in the share price performance.
Stone Point Capital, the Karfunkel Family, and AmTrust CEO Barry Zyskind are in the process of acquiring AmTrust in a transaction valued at approximately $2.7 billion with a view of taking AmTrust private. Evergreen Parent, an entity formed by private equity funds managed by Stone Point Capital will acquire the approximately 45 percent of the company's issued and outstanding common shares that the Karfunkel-Zyskind family and certain of its affiliates and related parties do not presently own or control.
But activist investor Carl Icahn has filed a lawsuit against AmTrust Financial Services and the family that controls the company, accusing them of trying to take the insurer private at the wrong time and at the wrong price.
The lawsuit filed in the Court of Delaware accuses Karfunkel-Zyskind family of engaging in a transaction which will transfer "huge amounts of value" belonging to the company’s public stockholders to the controlling family.
Icahn reportedly argued that the going-private deal unfairly benefits the controlling Karfunkel family at the expense of public stockholders. He asked a Delaware Chancery Court judge to hold Amtrust directors who backed the deal liable for not acting in the best interests of holders, according to the lawsuit.
Icahn recently disclosed a 9.38 percent stake in insurer AmTrust and said in a letter to the insurer’s board that he strongly opposed the going-private deal. Icahn expressed his “strong opposition to and intention to vote against” the proposed merger by and among Evergreen Parent.
Czech-based Arca Capital, which owns 2.4 percent of total outstanding shares of AmTrust, plans to work with Icahn and other minority shareholders in opposing the proposed privatization transaction.
AmTrust's arguments
AmTrust argues in the presentation that the all-cash offer of $13.50 per share provides unaffiliated stockholders immediate liquidity at a significant, certain premium to AmTrust’s unaffected closing stock price on Jan. 9, 2018. The offer price presents a 33 percent premium to the unaffected closing common stock price of $10.15 on January 9, 2018, the last trading day prior to the public announcement to acquire all common shares outstanding of AmTrust that the Karfunkel-Zyskind Family did not already own or control.
The value to the unaffiliated stockholders of the company continuing as an independent public company would not be as great as the merger consideration, due to the public market’s emphasis on short-term performance and the potential risks and uncertainties associated with the near-term prospects of the company, according to the presentation.
The proposal represents the highest price available following a two-month process while no alternative acquisition proposals have been identified during the period, the presentation says. The deal would shift the business risks and uncertainties faced by the company to the buyer group as AmTrust undertakes a transformation programme to achieve sustainable profitability, according to the presentation.
In addition to providing immediate liquidity at a significant premium, the transaction provides certain value to unaffiliated stockholders and shifts the business risk and uncertainties faced by the company to the buyer group, the presentation says. Among the risks cited in the presentation are ongoing reputational and business pressures faced by the company, slower growth, including higher than expected loss and combined ratios for fiscal 2017 and the fourth quarter of 2017 and the likelihood that such performance would be sustained for a longer than originally anticipated period of time, negatively impacting the company’s premium growth, underwriting margins and profitability.
The insurer, which specializes in the coverage for small businesses, reported a net loss of $348.9 million for 2017 after a net profit of $430.4 million in 2016.
Material weaknesses the company identified in its internal controls over financial reporting could result in adverse publicity, further litigation or action by governmental entities, the company warned in the presentation. AmTrust also faces the risk of a potential ratings downgrade by AM Best below “A”, especially in light of the fact that such ratings are “under review with negative implications”, which would likely reduce the amount of business the company is able to write. Furthermore, AmTrust is named as defendants in various legal actions, including securities class action lawsuits while responding to an investigation by the SEC, according to the presentation.
The counter-arguments
But Arca Capital argues that AmTrust is a fundamentally strong business and has questioned the justification for its share price decline of over 50 percent since January 2017. During that 15-month period, the stock dropped from over $27 per share to under $13 per share amidst no significant changes to the business, Arca Capital said in a May 21 statemetn. While ordinary shareholders have lost retirement and college funds, Barry Zyskind and his in-laws are now trying to privatize the firm at what Arca believes is an absurdly low valuation.
"AmTrust Financial is a fundamentally strong company but actions by Mr. Zyskind and his allies have undermined it,” said Pavol Krúpa, chairman of Arca Capital.
“Whether or not these actions were purposeful, the result was a significant stock devaluation that hurt ordinary investors but allowed the prospect of a cheap sale to the very same Barry Zyskind. At very minimum, AmTrust management took advantage of the uncertainty in the company's situation and the unfavourable market conditions to attempt to take AmTrust private on the cheap," Krúpa said.
"We stand on behalf of ordinary investors and will campaign aggressively to protect their interests when we believe they are not being served by management. In short - we've got their backs," Krúpa said.
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