Alleghany Blasts Up after Berkshire Hathaway Offer Hits

Insurance is big business these days. Anyone who needed proof of that need look no further than Alleghany (Y). Berkshire Hathaway (BRK.B) agreed to purchase the company at a substantial premium over its Friday close. The stock blasted up nearly 25% in premarket trading on Monday as a result, and the gains seemed to hold going into the day’s trading session.

The company looks to be a solid buy, though the quantity of premium paid could be negotiable. I, however, am bearish as the gains now seem to be baked in for the time being.

Alleghany stock has, historically, been volatile. The last 12 months alone feature the company trading between $600 and $750. Alleghany shot from around $626 to $729 in a little over a month back in March 2021, but by September’s end, it lost all those gains.

It then recovered and lost several times until Berkshire Hathaway’s buyout offer emerged — and what a buyout offer it was. It represented the single biggest deal the company has made since 2016.

Berkshire Hathaway agreed to pay $11.6 billion in an all-cash deal for the insurer. That works out to around $848.02 per share. Alleghany will continue to operate as an independent subsidiary after the deal concludes, which should be in the fourth quarter of this year.

Wall Street’s Take

Turning to Wall Street, Alleghany has a Moderate Buy consensus rating. That’s based on two Buys assigned in the past three months. The average Alleghany price target of $807.50 implies 4.4% downside potential.

Analyst price targets range from a low of $800 per share to a high of $815 per share.

Dividends Elusive, Hedge Funds and Insiders Wary

As big a deal as Berkshire Hathaway’s purchase represents, there are signs that not all was well within Alleghany, to begin with. Based on the TipRanks 13-F Tracker, hedge fund involvement with Alleghany has been on the decline since January 2021.

While hedge funds were increasing involvement with Alleghany through the fourth quarter of 2020, that involvement peaked in January 2021. It then began a downhill slide that continued to this very day. Meanwhile, insider involvement with Alleghany has also been declining.

Over the last three months, insiders sold a combined total of $687k in shares. Granted, at Friday’s closing price of $676.75 per share, that would only represent just over 1,000 shares.

Dividends, meanwhile, are sporadic, though substantial at Alleghany. Alleghany’s dividend history has just two listed dividends in the last four years. One was March 2018, which came in at $10 per share. Two years later, in March 2020, the company raised it to $15 per share.

A Premium, Sure, but Why That Big a Premium?

Easily the biggest question in this whole deal is why Berkshire Hathaway felt it had to shell out that large of a premium to get its hands on Alleghany. This is the biggest deal the company has made in years. The specifics on how large the deal actually is are even more distressing.

Reports noted the purchase price “represents a multiple of 1.26 times Alleghany’s book value at December 31, 2021.” It also represents a 16% premium over Alleghany’s 30-day stock price average.

Alleghany may not be a household name by itself, but it actually comprises some in its operations. It owns General Reinsurance, and it also owns Geico auto insurance. Further, Alleghany counts a toymaker, a hotel developer, a custom trailer maker, and even a funeral products maker as units in its operations.

That level of diversification is a plus, but it may be getting dangerously close to too much diversification. After all, there’s something to be said for economies of scale, and branching out into too many different fields can diffuse focus and produce less-than-optimal results.

The numbers certainly don’t help matters. While Alleghany’s dividends are hefty, they require a perhaps heftier price tag to get in. Alleghany hasn’t closed under $400 a share in the last five years.

The gains realized from Berkshire Hathaway’s offer are likely baked in; the current share price is over the highest price target by nearly $30 per share, and downside risk is now evident. With insiders and hedge funds trimming their involvement, that doesn’t bode well for Alleghany either.

At this point, likely the only sound reason to shell out that kind of money is because Berkshire Hathaway wanted the deal to move as smoothly as possible. If there were resistance to the deal within Alleghany itself, a sizable portion of it would be wiped out by the huge premium offer.

Concluding Views

This deal is likely a good move for Berkshire Hathaway. It now has a conglomerate with a presence in a range of industries in its stable now. These industries range from industries good largely in boom times to “recession-proof” operations that everyone must have regardless of economic conditions.

This helps provide cash flow to Berkshire Hathaway and gives it improved operating conditions regardless of the economic conditions around it.

Right now, though, it doesn’t seem like a good plan to buy in on Alleghany. Berkshire Hathaway’s offer has likely set both ceiling and floor for the company in the near term.

The narrow range of price targets from analysts bears that much out. With clear downside risk now present, it’s probably a good plan to stay away from this one. Alleghany’s chances of going up further from here don’t seem positive.

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