Tokio Marine Buys Philadelphia Consolidated For $4.7 Billion

Japanese insurer Tokio Marine Holdings Inc. (TMHD) said today it will acquire Philadelphia Consolidated for $4.7 billion, and analysts saw the transaction as a good deal for the Bala Cynwyd, Pa.-based property-casualty insurer.

Analysts said the price should make Philadelphia Consolidated stockholders happy and the acquisition will provide opportunity for TMHD to expand its presence in Europe and the United States.

The companies said TMHD will acquire all outstanding shares of Philadelphia Consolidated, for $61.50 per share in cash, through TMHD's wholly owned subsidiary, Tokio Marine & Nichido Fire Insurance Co., Ltd. (TMNF).

Robert Farnam, an analyst with Keefe, Bruyette & Woods, said he had seen Philadelphia Consolidated as an acquisition target, but the sale was for more than he had expected. He said he had guessed it would go for 2.4- to 2.7-times book, “and they went for 2.75.”

He and other analysts said that from what the companies said in a briefing it appeared that Philadelphia Consolidated would be able to operate in a relatively autonomous fashion and there would be no layoffs involved.

Mike Grasher of Piper Jaffray said based on what management said Philadelphia Consolidated had “done their homework and looked into other suitors and came away with Tokio Marine as the best fit.”

He noted that risks are always involved with integrating companies, but it sounded as though Philadelphia Consolidated would be left alone to do its business while “ratcheting up their product in other markets.”

South America and Canada are markets that TMHD would like to use Philadelphia Consolidated to enter, and the U.S. company’s products “may play well in Europe,” he said.

Standard & Poor's said it was affirming the Japanese firm’s ratings with a stable outlook. It said that given TMHD’s recent acquisition of London-based Kiln Ltd., the firm is “challenged to promptly consolidate the acquired companies into the group and establish group-wide management and risk management systems.

If TMHD’s overseas business progresses as planned, S&P said the firm could be due for an upgrade.

Philadelphia Consolidated has 47 offices and approximately 1,400 employees across the United States. The companies said the transaction would combine Tokio Marine's financial strength and international market knowledge with Philadelphia Consolidated’s product development capabilities and multichannel distribution expertise.

Shuzo Sumi, president of Tokio Marine, said in a statement, "Expansion of revenue and profits from international business is the driving force of Tokio Marine's mid- to long-term growth strategy. The acquisition of Philadelphia Consolidated is consistent with our aspirations of expanding globally and realizing a well-balanced business portfolio.”

He called Philadelphia Consolidated “an excellent strategic fit for us.”

“When opportunities to acquire a premier organization arise, the best response is to act," Mr. Sumi said.

James J. Maguire, Philadelphia Consolidated’s chairman, said, "I founded this company in 1962. This is a great opportunity for us to take the company to the next level, and as a demonstration of our commitment, the executive management team and I will be making a substantial investment in TMHD's stock promptly after closing of the transaction, and I will become a member of the International Strategic Committee of Tokio Marine.”

James J. Maguire Jr., Philadelphia Consolidated’s chief executive officer, said his company’s management is “committed to the successful growth of the business and delivering a performance which will continue our superior level of achievement.”

“Joining the Tokio Marine Group with its international reach will fuel the next stage of our growth and will provide numerous benefits for our customers, brokers, agents and employees.”

The Pennsylvania firm will provide a platform for Tokio Marine, while Tokio Marine's “credit quality and overall financial strength will open up additional avenues of expansion, further enabling the combined company to generate enhanced returns," he said.

Mr. Sumi said the firms believe “we share common fundamental values and a business philosophy, and we look forward to a long and successful partnership."

The companies announced the profits and losses of Philadelphia Consolidated will be consolidated into TMHD's financial statements from fiscal year 2009 and will deliver greater earnings consistency throughout the insurance pricing cycle.

The boards of directors of both companies have unanimously approved the transaction and key family shareholders, representing approximately 18 percent of Philadelphia Consolidated's outstanding shares, have agreed to vote in favor of the transaction.

The acquisition is subject to the approval of Philadelphia Consolidated shareholders and the approval of various regulatory authorities in Japan and the United States. The transaction is expected to close in the fourth quarter of 2008.

Fox-Pitt Kelton Cochran Caronia Waller acted as financial advisors to Tokio Marine for the transaction and Sullivan & Cromwell LLP provided external legal counsel. Merrill Lynch & Co. acted as financial advisors to Philadelphia Consolidated and WolfBlock LLP provided external legal counsel.