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Alterra Capital (ALTE) Downgraded To 'Hold' By Deutsche Bank Following Rally On M&A Offer

 December 20, 2012 02:20 PM

(By Balaseshan) Deutsche Bank analyst Joshua Shanker downgraded rating of Alterra Capital Holdings Ltd. (NASDAQ: ALTE) to "Hold" from "Buy" following rally on merger and acquisition offer, with $29 price target.

On Wednesday, Markel Corp. (NYSE: MKL) said it has agreed to buy Alterra Capital, which provides diversified specialty insurance and reinsurance products, for about $3.13 billion. Each of Alterra's shares would be acquired by Markel in exchange for 0.04315 shares of Markel and $10 in cash.

Shanker does not expect a bidding war to ensue with another suitor aiming to buy Alterra at a higher price. His "Hold" rating is based on the assumption that the stock will largely trade in parity with Markel until being acquired.

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The analyst believes that Markel shareholders does not resemble Alterra shareholders. Markel shareholders are sticky investors in an illiquid never-split stock who seek equity market correlated returns under Tom Gaynor's stewardship conjoined with an insurance company.

Shanker questions whether Alterra shareholders wish to become Markel shareholders with its unique value proposition or whether they might sell in advance. Further, he believes there will be some investors who prefer to take a long-term capital gain at 2012 tax rates as opposed to the tax associated with a $10 cash dividend in 2013.

The analyst expects the deal to close in 2Q-2012 and believes that approval from both set of shareholders is likely. Markel had made its desire to find an acquisition known to its shareholder base.

[Related -Markel (MKL) To Buy Alterra Capital (ALTE) For $3.13B]

Cash and stock consideration for Alterra shares was worth $30.97 when announced, but is currently worth $28.82, following Markel's decline of more than 10%. 0.04315 shares of newco Markel and $10 of equity are worth $28.08 as of 3Q-2012, so the stock currently trades above book value per share, Shanker noted.

The analyst doesn't expect that book value per share has increased materially due to a flat stock market quarter-to-date and the impact of Hurricane Sandy. The biggest risk to Alterra's share price would be a decline in Markel's, which is levered to the stock market, the analyst noted. A decline in either's shareholder of more than 20% could scuttle the deal.

Shanker believes a broad equity market decline of greater than 16% has a higher likelihood of causing this to happen to Markel's equity (0.6-to-1 common stock-to-shareholders' equity leverage) than would an earthquake event cause losses with such an impact to Alterra.

ALTE is trading down 0.60% at $28.01 on Thursday.



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