Shares of Chubb Corp (CB), the Warren, New Jersey-based property and casualty insurer, roared 30% higher today after Switzerland’s ACE Limited (ACE) agreed to buy Chubb for $28.3 billion in cash and stock. But it’s not just the CB stock price that’s gaining on the news — ACE stock was up as much as 3% on Wednesday as well.
In Chubb, ACE further diversifies its operations across geographies and adds exposure to higher-net-worth individuals — a coveted demographic in just about any industry.
Few expected CB stock, which through yesterday’s close was having a rough 2015 (down 8%), to be the target of an imminent acquisition, but the deal makes sense for both Chubb and ACE stock owners.
The upside for investors in CB stock is pretty straightforward: they’re getting bought out at a massive premium. At the sound of the closing bell on Tuesday, CB stock paid a solid 2.4% dividend yield, and it’s not a stretch to assume that most shareholders were income investors after that quarterly check.
After all, Chubb boosted its dividend by 14% earlier this year, increasing its distribution for a 49th consecutive year. The ACE-Chubb merger was unanimously approved by both boards, and owners of CB stock will receive $62.93 per share as well as 0.6019 shares of ACE stock — a cumulative value of $124.13 at yesterday’s close.
But why would ACE stock also rise on the news? Usually an acquiring company paying a hefty premium for its target sees shares fall on the announcement of the deal.
Well, some deals are so clearly win-wins that the market is forced to acknowledge the premium was worth it, and that seems to be what Wall Street’s saying about ACE stock today. The deal, which is expected to close in the first quarter of 2016, should be immediately accretive to earnings per share, according to the news release.
While primarily middle-market, Chubb’s Masterpiece homeowners coverage gives ACE niche access to high-net-worth U.S. individuals, and made Chubb all the more attractive.
On top of that, the fact that the deal creates a massive globally diversified insurance conglomerate doesn’t hurt, either. ACE chairman and CEO Evan Greenberg essentially hailed Chubb as the perfect hedge for ACE:
“We have complementary product strengths – where one of us is not present, the other is. Where one of us is strong, the other is even stronger. Where there is overlap in product, generally one of us is more present at the large end of the corporate market while the other is serving the smaller or mid-market segment.
The data and insight we will gain from our respective skills and experience will allow us to do so much more. For example, Chubb will enhance ACE’s ability to serve the upper middle market, while ACE will provide more products to serve Chubb’s middle market clients, and our combined strengths will enable us to pursue the small and micro markets globally.”
The news release concludes by predicting that EPS will not only be accretive, but by year three the effect will be in the double digits.
While these might not be the two most exciting companies in the world, you can’t retire on the merits of how “exciting” your portfolio is. Which goes to show: sometime slow, steady, and painfully boring wins the race.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.
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