Aspen defiant in the face of Endurance’s 'strategic mismatch'

Aspen has announced that the company’s board of directors unanimously rejected the unsolicited exchange offer from Endurance to acquire all of its outstanding shares for a combination of common stock and cash.

The board determined that the offer is not in the best interests of Aspen or its shareholders, noting that the value offered by Endurance is unchanged from the unsolicited proposal it made on June 2nd, 2014, which Aspen’s board considered and rejected.

Aspen has also issued an investor presentation detailing the company’s strong standalone growth strategy, clear path for continued improvement in return on equity, and the inadequacy of Endurance’s offer.

Glyn Jones, chairman of the board of directors, says, “The Aspen board of directors is unanimous in its belief that the Endurance offer significantly undervalues Aspen and fails to reflect the value of our business and strong future prospects. We are highly confident that Aspen can achieve more value for its shareholders – and without the significant risks that are inherent in a merger with Endurance – by continuing to execute its strategic business plan.”

He adds: “Beyond the offer’s significant undervaluation of our company, we believe that there is a fundamental strategic mismatch between Aspen and Endurance and that a combination would create significant dis-synergies. Additionally, the 60 percent stock component of Endurance’s offer is highly unappealing given Endurance’s unattractive business mix, with an overreliance on the volatile, low-margin and challenged crop insurance business and a dependency on reserve releases to fuel earnings. We urge shareholders not to tender their shares into Endurance’s offer.”

The reasons for the board’s recommendation are set forth in a Schedule 14D-9, which is being filed with the SEC and disseminated to shareholders. Among the specific reasons cited in Aspen’s Schedule 14D-9 are the following:

1. While Aspen’s business has strengthened, Endurance’s offer has become even less attractive

Aspen’s diluted book value per share at March 31st, 2014 was $42.72, up 4.4 percent from December 31st, 2013. Endurance’s ‘revised’ offer is viewed as a step backwards, representing a lower premium over diluted book value per share than its initial offer. Moreover, Aspen believes Endurance touts a “headline price” that simply does not exist. “Endurance has been publicly stating that it is offering ‘$49.50’ per share, but the stock component of the offer consideration is currently – and has since announcement of its offer on April 14th - been worth less than this headline price.”

2. The offer significantly undervalues Aspen

Aspen believes that Endurance’s offer significantly undervalues Aspen, and is confident that its strategic plan will deliver value to its shareholders that is superior to the offer. Aspen says it is successfully executing on its plan. In the first quarter of 2014, its annualized operating return on average equity was 14.8 percent. This was the highest quarterly ROE since Aspen began significant investments in the business. As a result, it believes that the company is well positioned to achieve its 10 percent operating ROE objective in 2014, and would expect operating ROE in 2015 to increase over 2014 on the order of 100 basis points.

3. Endurance Common Stock is an unattractive transaction currency

Aspen believes that Endurance has historically underperformed, and there are a number of reasons why the company does not accept Endurance’s claims about its prospects and believes that Endurance’s stock is not an attractive currency, particularly in comparison to Aspen’s shares.

4. The combination of Aspen and Endurance would not be financially attractive to Aspen shareholders

There are a number of important reasons why the combination of Aspen and Endurance is not a financially attractive alternative for Aspen shareholders. In particular, Aspen believes Endurance’s estimate for dis-synergies dramatically understates the real-world impact of combining Aspen’s and Endurance’s businesses, and that the loss of business resulting from dis-synergies would cause significant financial harm to its shareholders. Aspen’s dis-synergies estimates are consistent with feedback received from clients, brokers and employees, and the company expects that the business lost would be among the most valued and would not be easily replaced.

5. The offer fails to disclose material information with respect to Endurance’s financing

Aspen says that the terms and availability of Endurance’s financing remain unclear and continue to lack certainty. Endurance’s $1 billion bridge loan facility is temporary, maturing in less than one year, and the intended “take-out” financing is not committed: “It appears that Endurance intends to replace the bridge loan by issuing a substantial amount of common equity, at an uncertain price expected to be at a discount to market.”

6. Endurance’s coercive legal tactics are an attempt to acquire Aspen at the lowest possible price and will result in significant time, expense and distraction to Aspen

Aspen believes the proposal to increase the size of its board to 19 would create an unwieldy and untenable corporate governance structure and Endurance’s scheme of arrangement would be an unprecedented usurping of an independent board’s judgment in its attempt to acquire Aspen at a price that significantly undervalues them.

7. The offer is replete with uncertainties and onerous conditions

Endurance’s completion of the offer is subject to a litany of conditions that run for six pages of Endurance’s offer filing, creating major uncertainty as to whether the offer could be completed and, if completed, when and at what price.

8. Aspen has received an inadequacy opinion from its financial advisor

Goldman Sachs rendered its oral opinion to the Aspen board, subsequently confirmed in writing, that as of June 13th, 2014 and based upon and subject to the factors and assumptions set forth in the written opinion, the consideration proposed to be paid to the holders (other than Endurance or its affiliates) of Aspen shares pursuant to the Offer was inadequate from a financial point of view to such holders. The full text of the written opinion of Goldman Sachs is attached to Aspen’s Schedule 14D-9 filing.