Canada Pension Fund to Commit $1B to Fairfax’s Deal with Allied: Sources

Article

Prem Watsa’s Fairfax Financial Holdings Ltd. is close to announcing a deal that would see one of Canada’s largest pension funds contribute $1 billion in financing toward its acquisition of insurer Allied World Assurance Co., according to people familiar with the matter.

Toronto-based Fairfax could announce the financing arrangement with the Ontario Municipal Employees Retirement System (OMERS) as early as this week. Watsa is also putting together another group of funds to contribute as much as $1.7 billion in financing to the purchase of Zug, Switzerland-based Allied that will likely be announced at a later date, said the people who asked not to be identified because the matter is private.

Shares in Fairfax were little changed at C$619.79 apiece in Toronto as of 1:47 p.m. [on Jan. 24]. Allied’s shares rose 1.3 percent to $53.47 in New York.

Representatives for Fairfax and OMERS didn’t return requests for comment.

Fairfax agreed in December to buy Allied in a cash-and-stock deal valued at $4.8 billion, with as much as $4 billion of the cost covered by Fairfax shares. Watsa’s company said last month that it could limit dilution by bringing in partners for up $2.7 billion of the purchase price, similar to when OMERS helped finance Fairfax’s purchase of insurer Brit Plc in 2015.

Fairfax had 75 days from the deal being announced on Dec. 19 to exercise the option, and is in talks with the group of funds to help finance the remaining $1.7 billion that is expected to be announced by the March 4 deadline, one of the people said.

Without Watsa bringing on the partners, Allied’s investors would have gotten a 27 percent stake in his insurance and investing firm. If the full $2.7 billion is contributed in cash, that would be reduced to 10 percent, under the terms of the agreement.

Fairfax has the lowest of 10 investment grade scores by S&P Global ratings, which limits Watsa’s ability to take on more debt without risking a cut to junk status.

The deal will expand Fairfax’s reach in the commercial insurance market. Also, the purchase will boost Fairfax’s investment portfolio to $39 billion from about $30 billion.

Related: