Capital Re yesterday escalated with ACE raising its takeover offer to $14 a share in cash and stock.

This matches the competing all-cash offer from rival XL Capital Ltd., according to an announcement made by the specialist reinsurer Capital Re.

On Thursday it was revealed that ACE had sued New York-based Cap Re, claiming that it had breached its merger agreement with ACE by negotiating a separate deal with XL.

But on Monday Vice Chancellor Strine of Delaware Chancery Court denied ACE's temporary restraining order to block negotiations between Cap Re and XL.

Yesterday Cap Re announced that ACE made the higher offer immediately after the decision was made in court.

The court's ruling permits Cap Re's board to accept XL's $14-a-share all-cash offer made on October 18, if ACE has not made an offer "at least as favourable'' as XL's offer.

The two offers value Cap Re at $511 million, based on Cap Re's 36.5 million outstanding shares.

Cap Re said a special committee of its board will met yesterday to evaluate whether the latest ACE offer is "at least as favourable'' as XL's $14.00 all cash offer.

Under its revised offer, ACE would provide Cap Re shareholders with 0.65 ACE shares for each Cap Re share, plus enough cash to bring the bid up to $14 a share, but not more than $4.68 a share in cash.

ACE's previous proposal called for Capital Re shareholders to swap each of their shares for 0.60 shares of ACE and enough cash to bring the value of the bid to $13 a share.

Under the new offer, Cap Re shareholders would receive $14 a share if ACE's stock price is between $14.34 and $19.54 per share.

If ACE's stock price is below $14.34 per share or above $19.54 per share, Cap Re shareholders would receive less value or more value, respectively.

The battle between the two giants for the comparative minnow of Cap Re began in earnest on October 6, when XL Capital made an unsolicited bid to buy the company in an all-cash offer for $12.50 a share, putting a value of $456 million on the company.

This put paid to ACE's plans. ACE had been wooing the company since March 1998, when it formed a joint venture with Cap Re that, at the time, was worth an estimated $606 million.

ACE then bought $75 million worth of Cap Re stock through its subsidiary ACE Bermuda Insurance, which meant it owned 10 percent of the company.

But the day before shareholders were scheduled to decide on whether to accept the deal, XL stepped in with its unsolicited cash bid, scuppering ACE's carefully laid plans.

Since then both sides have upped their bids, and are awaiting a decision of the special committee of the Cap Re board, which at the time of going to press, had not yet been revealed.

Shares of ACE fell 44 cents to $16.94 in Tuesday morning trading on the New York Stock Exchange. XL rose 25 cents to $46.75 on the NYSE, and Cap Re rose 44 cents to just over $14.

Brian Duperreault, Chairman, President and CEO of ACE