California insurance regulators on Monday rejected a plan to purchase Los Angeles-based Farmers Insurance Group, dealing a severe blow to a related $21-billion international takeover effort by British financier Sir James Goldsmith.
Two European firms--Axa Midi Assurances and Goldsmith's Hoylake Investments--had jointly sought to buy Farmers, one of the biggest insurers of cars and homes in California, which is now owned by BAT Industries of London. Their purchase was intended to clear the way for Goldsmith to acquire BAT, a sprawling conglomerate that also owns tobacco companies and retailers. The takeover would rank as one of the biggest ever in Britain, where such corporate raids are a rarity.
But the California Department of Insurance, in ruling the bid as deficient and possibly harmful to policyholders, acknowledged that the decision could derail Goldsmith's takeover. Goldsmith had proposed to sell Farmers to Axa Midi immediately after acquiring BAT.
Goldsmith and Axa Midi did not concede defeat, but BAT claimed victory.
"We are celebrating," said Jon Coles, a BAT spokesman in London. "You are talking to a very happy crew."
Coles added: "We firmly believe that (the hostile takeover) is over, but we will have to see what the other side decides to do."
BAT Chairman Patrick Sheehy said in a prepared statement: "We now look forward to being able to manage our business, of which Farmers is a key strategic element, without further distractions."
BAT has been fighting Goldsmith's bid for nearly a year. Farmers was a key element in BAT's defense, but the conglomerate also launched a companywide restructuring plan last October and put many of its valuable retail franchises--including Saks Fifth Avenue and Marshall Field's--on the block in an effort to thwart Goldsmith.
Industry experts said the insurance department ruling was a severe impediment to the deal because no acquisition of BAT could go through without getting insurance department approvals for a change of control at Farmers.
However, a spokesman for Goldsmith said the group was "considering its position in light of the ruling" and would make no further comment.
Axa Midi Chairman Claude Bebear vowed to continue his efforts to gain control of Farmers.
"Axa fully intends to continue its efforts to receive approval from U.S. regulators for its acquisition of Farmers," Bebear said in a statement. "We are confident that we can successfully address the concerns expressed by the (insurance) department and ultimately receive approval in California."
The differing reactions underscore the complexity of Goldsmith's bid, which is currently on hold in Britain while awaiting insurance department rulings in nine states over the acquisition of Farmers.
In essence, Goldsmith wants to take control of BAT and sell off all its assets with the exception of its tobacco business. However, because BAT owns Farmers, any buyout of BAT must be approved by insurance regulators in the states where Farmers does business.
Hoylake has declined to give insurance regulators details about its acquisition of BAT because it said it planned to immediately sell the asset to Axa Midi, a French insurance concern roughly the same size as Farmers.
Axa Midi consequently submitted its plan to buy Farmers, but regulators rejected the plan because of several concerns, said Insurance Commissioner Roxani M. Gillespie.
The deal was too highly leveraged and required Farmers to pay off a significant portion of the acquisition debt, Gillespie said. It also relied on getting companies affiliated with Farmers to go along with costly changes in their operations.
Moreover, Axa had not clarified a number of "loose ends" to the regulator's satisfaction, including how Axa would cover takeover-related debt payments.
More importantly, Gillespie said, the department was not willing to overlook Hoylake's involvement in the takeover. Hoylake, an investment group controlled by Goldsmith, is the vehicle through which he is pursuing Farmers.
"Axa not only needs to deal with the problems in its own offer, it also needs to cure the problems of Hoylake's offer," added Lorraine Johnson, senior staff counsel for the California Department of Insurance.
Hoylake's offer was rejected by regulators on a host of grounds, including the fact that there is currently no firm proposal on the table and there are no provisions for financing the deal. Goldsmith suspended his formal offer for BAT in London after getting an unprecedented go-ahead from British takeover authorities to put the deal on hold while Hoylake and Axa attempted to get regulatory approvals from U.S. insurance departments.
California is the first and most important of the approvals necessary for the takeover since Farmers is not only headquartered here, more than 40% of its business is done in the state.
Nevertheless, Axa maintains it still has a chance to complete the buyout.
"This initial decision is the first step in a long process involving hearings and investigation by insurance departments in California and eight other states throughout the U.S.," Axa chief Bebear said. "It is critical in this situation to remember that BAT did not receive initial approval in several states before its eventual success in acquiring Farmers. In fact, BAT also received a 'no' on its first application in California"
Bebear added that he believes that the insurance department's objections are "within reason" and that Axa will be able to successfully address those concerns.