The bidding war for Capital Re Corporation (Cap Re) between Bermuda giants ACE and XL Capital took a new twist yesterday, with news that ACE has sued Cap Re, claiming that it breached its merger agreement with ACE by negotiating a separate deal with XL.

The suit, which was filed in Delaware Chancery Court, also seeks to restrain Cap Re from breaking the merger agreement until ACE's claims can be decided in court.

New York-based Cap Re said it believes ACE's lawsuit is without merit and plans a vigorous defense.

A blanket of silence descended on the two Bermuda companies yesterday, with neither organisation willing to say a single word in public about developments in the Cap Re situation.

An analyst at ScotiaMacleod, a member of Canada's Scotibank Group, said yesterday that, while he wwas not familiar with the players in the Cap Re situation, "these events tend to follow a tried and tested path''.

Speaking on condition of anonymity, he said that the lawsuit need not deter the present bidders, or others, from making new bids. "Typically, contested situations such as these start off with competing bids and often end with acrimony and damaged egos,'' the analyst said.

"I know the Bermuda companies tend to be friendlier than, say, their American counterparts when all is going well, but no businessman likes to lose,'' he continued. "If you have two well-heeled companies such as (ACE and XL), both of whom have sniffed an opportunity to claim market share at a time of trying conditions, it could easily descend into a knock-down, drag-out fight, with no love lost.'' Cap Re announced in May that it was to be acquired by ACE in a stock deal now valued at $9.60 a share, based on ACE's closing price of $16 on Wednesday.

Earlier this month, Cap Re received an unsolicited offer from XL for $13 a share in cash and entered into negotiations with XL. ACE last week sweetened its original all-stock offer to include enough cash to match XL's $13-a-share cash bid.

ACE sues Cap Re But XL countered earlier this week by raising its bid to $14 a share cash, valuing Capital Re at $511 million based on Capital Re's 36.5 million outstanding shares.

Capital Re's board of directors notified ACE of XL's improved offer and said ACE has until the close of business next Tuesday to respond.

Capital Re said its directors had not yet determined whether XL's latest bid was as favourable as ACE's offer.

Under the existing deal with ACE, Capital Re would be required to pay ACE a $25 million break-up fee if it walked away from the table.

Cap Re is one of two companies which dominate the financial guaranty (or "bond'' reinsurance market. Cap Re and Enhance Re are estimated to share between them two-thirds of the bond reinsurance market.