‘Baby Berkshire’s’ acquisition of Alterra makes it ‘fantastic’ share buy

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    Strong combination

Markel Corp, often called a “baby-Berkshire”, currently looks like “a fantastic bargain” following its acquisition of Bermuda’s Alterra Capital, a top investment services company says.

Markel closed on its acquisition of Alterra on May 1, but it just finally released details of the pro forma statements for the newly combined company, which the CEO of Markel has said will create a strong company in global specialty insurance and investments.

“Last December, Markel (NYSE: MKL) shocked the market by announcing a $3.1 billion deal to acquire fellow insurer Alterra Capital,” The Motley Fool said.

“The deal not only unsettled investors by employing a combination of cash and stock, but it was also significantly larger than the typically small acquisitions that President and CIO Tom Gayner pursues through his Markel Ventures subsidiary. The market immediately punished shares of Markel by driving them down as much as ten percent that day.”

Motley Fool notes Markel is often called a "baby-Berkshire", and that Alterra's reinsurance operations diversify Markel's insurance segment while making it “more Berkshire-esque than ever”.

The site goes on to say: “Then, perhaps predictably, Alterra Shareholders followed up in February by overwhelmingly voting to approve the merger of the two companies, paving the way for them to receive 0.04315 Markel shares plus $10 cash for each share of Alterra they owned, as stipulated in the terms of the buy.

“Finally, on May 1, Markel announced it had officially completed the acquisition, noting at the time that the combined company could boast around $23 billion in total assets, with around $6 billion in shareholder equity. Even so, all the synergies and advantages in the world don't mean much for investors if a stock is overpriced. So how does the new Markel stack up?”

In the recent SEC filing from Markel, the company gave specific details on the pro forma combined statements of Markel and Alterra

The filing reveals: “First, at the end of the most recent quarter, the two companies actually had combined assets of just over $23.5 billion, with shareholder equity (or book value) listed at $6.5 billion.

“Next, if you scroll down a few pages, you'll see the number of diluted ‘preliminary pro forma adjusted weighted average common shares outstanding’ (try to say that ten times fast) stood at 14,092,000 as of this past March 31.

“Multiply that by Tuesday's closing price of roughly $537 per share, and that gives us a current market capitalisation for the combined companies of around $7.57 billion.

“With the shareholder equity I mentioned, that means the combined moneymaking machine that is Markel and Alterra is currently trading at just over 1.16 times book value — not too shabby for a well-respected financial holding company like Markel.

“To put that in perspective, remember that Buffett told the world last year he'd be willing to buy back shares of Berkshire Hathaway if the price to book ratio fell below 1.2. As it stands, and even though many investors still consider it cheap at today's levels, Berkshire Hathaway stock currently trades around 1.46 times book value.

“Of course, Markel is still much more of a pure insurer than Berkshire Hathaway, whose five largest non-insurance businesses boasted aggregate earnings of $10.1 billion last year. In addition, Berkshire continues to spend billions every year on smaller bolt-on acquisitions, which are melded into its existing operating units.

“Still, though total sales from Markel's own group of non-insurance businesses clocked in at just $489.4 million in 2012, that did represent a 67 percent increase over the prior year as Markel continued to pursue its own group of comparatively tiny acquisitions.”

Motley Fool says Markel's small size — even after merging with Alterra — remains one of its greatest assets.

“This becomes especially apparent when we remember Buffett hasn't been shy about calling out Berkshire's enormousness as one of the primary reasons he won't be able to duplicate his incredible past rates of return.

“Long story short, at only 1.16 times book value, Markel currently looks like a fantastic bargain, and I believe that patient shareholders who buy now stand to be rewarded handsomely over the long run. ”

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Published Jul 18, 2013 at 8:00 am (Updated Jul 17, 2013 at 7:01 pm)

‘Baby Berkshire’s’ acquisition of Alterra makes it ‘fantastic’ share buy

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