Morgan Stanley x Goldman Sachs - Transaction Materials

In partnership with

🔎 Transaction Overview

A Quick Message from 1440 Media:

Receive Honest News Today

Join over 4 million Americans who start their day with 1440 – your daily digest for unbiased, fact-centric news. From politics to sports, we cover it all by analyzing over 100 sources. Our concise, 5-minute read lands in your inbox each morning at no cost. Experience news without the noise; let 1440 help you make up your own mind. Sign up now and invite your friends and family to be part of the informed.

Sign up today!

🔒 Going-private Transaction: Watford Holdings Ltd.

A notable transaction in the (re)insurance sector unfolded when Arch Capital Group Ltd. (“Arch”), along with Kelso & Company and Warburg Pincus, acquired Watford Holdings Ltd. (“Watford”). This strategic move allowed Arch to strengthen its position in a rapidly changing industry. But what drove this deal, and why did it make such an impact?

Let’s break it down.

📃 2013-2014: Formation and Establishment of Watford

• Dec-13: Watford was incorporated in Bermuda as a multi-line property and casualty (re)insurance company.

• Mar-14: The company officially began operations with a unique business model, blending traditional underwriting with alternative asset management strategies.

  • Underwriting Partner: Arch, a global leader in insurance and reinsurance, became a key stakeholder and provided underwriting services through its subsidiary, Arch Underwriters Ltd.

  • Investment Manager: HPS Investment Partners (formerly Highbridge Principal Strategies) was appointed as the investment manager, focusing on high-yield, non-investment grade assets to boost investment returns.

💼 2014-2018: Operational Growth and Business Model

Watford centered its efforts on casualty reinsurance, property catastrophe reinsurance, and various insurance programs, leveraging Arch's underwriting expertise to enhance its offerings.

Unlike traditional reinsurers, Watford pursued a bold investment strategy, allocating a large portion of its assets to non-investment grade fixed-income securities to aim for higher returns – despite the associated risks.

This strategy fueled growth in gross premiums and investment income, but also brought volatility due to the fluctuations in its investment portfolio.

📊 2019: IPO and Initial Performance Challenges

In March 2019, Watford achieved a significant milestone by completing its initial public offering and listing on the NASDAQ Global Select Market under the ticker symbol "WTRE."

The IPO was priced at $25 per share, and aimed to provide liquidity to existing shareholders and secure capital for general corporate purposes. But despite the promising start, challenges soon emerged.

Watford’s stock price became volatile, often trading below its IPO price, as investors questioned the company’s investment strategy and variable earnings. Limited analyst coverage and a lack of understanding of its hybrid business model added to concerns about undervaluation.

Financially, Watford’s 2019 results were mixed – underwriting losses balanced by gains from its investments – highlighting the complexities of its approach.

📉 2020: Impact of COVID-19 and Strategic Review

In 2020, the global pandemic posed serious challenges for Watford. Market disruptions in the first quarter led to significant unrealized losses in its non-investment grade portfolio, adding financial strain. This caught the attention of rating agencies, with A.M. Best placing Watford's financial strength rating under review with negative implications on May 1, 2020, due to concerns over its risk-adjusted capitalization.

Investor confidence took a hit, and Watford’s stock price declined as the market worried about the company’s exposure to economic downturns. In response, Watford’s board initiated a strategic review to explore options for maximizing shareholder value, including a potential sale.

By August 2020, Arch, already a significant shareholder with about a 13% stake, expressed interest in acquiring the remaining shares of Watford. Following a situation assessment from Goldman Sachs (buy-side advisor), Arch, in collaboration with a consortium of private equity firms (“the Group”), made an initial verbal offer of $25 per share.

Recognizing the need to act in the best interests of shareholders, Watford's board quickly evaluated the proposal and entered into negotiations with the Group. A competitive bidding process unfolded in September 2020, with offers and counteroffers between Watford and the Group. Eventually, the investors increased their bid to $31.10 per share, a process well-documented by Morgan Stanley in their end of September update.

Adding complexity to the situation, Enstar Group Limited, a global insurance player, entered the fray by submitting a competing bid of $31.00 per share on September 30, 2020. Watford's board meticulously deliberated over the financial and strategic merits of both offers, considering factors such as valuation, the likelihood of execution, and the ability to secure necessary regulatory approvals.

Ultimately, on October 9, 2020, Watford announced that it had entered into a definitive merger agreement with Arch, Kelso & Co. and Warburg Pincus. Under the terms of the agreement, the Group would acquire all outstanding shares of Watford at $31.10 per share in cash as reported by Morgan Stanley. This transaction valued Watford at app. $622 million, representing a significant premium over its stock price prior to the initial offer.

However, the bidding war didn’t end there. In mid-October, Enstar raised its offer to $34.50 per share. The Group quickly responded on October 27, 2020, with a revised bid of $35.00 per share, contingent on an agreement with Enstar to support the transaction.

After thorough consideration, Watford’s board reaffirmed its commitment to the deal with the Group, concluding that it offered the best outcome for shareholders. The acquisition closed on July 1, 2021, with Watford's final stock price at $35 per share, valuing the company at around $700 million.

✒ On a Final Note…

I hope you found this post insightful. Deal processes are rarely straightforward, often involving last-minute bidders and heightened scrutiny. When large companies are involved, challenges with valuations, due diligence and investor pressure add to the difficulty of closing a deal.

These hurdles demand adapting to shifting market conditions, precise risk management, timely due diligence and the ability to make informed, decisive moves. Success in these situations often relies on strong leadership, expert financial modelling, and anticipating investor concerns while driving the transaction forward under tight deadlines.

Until next time,  
PE Bro 

P.S. Was this email forwarded to you? Then subscribe here!

Work Smarter, Not Harder. 

Check out our tools which include pitch decks based on real, successful deals, and quickly learn how the top IBs structure their presentations.