Merrill: Travelers conversion ratio adjusted lower by St. Paul merger; St. Paul converts not affected

By Ronda Fears

Nashville, Nov. 17 - The conversion ratio on the Travelers Property Casualty Corp. convertible notes will be lowered by the merger with The St. Paul Cos. But the contingent conversion trigger will not be activated, by Merrill Lynch analysts' estimation, while the two St. Paul convertibles will be unaffected.

On Monday, St. Paul and Travelers announced a definitive merger that would create the second-largest commercial insurer in the United States, to be named The St. Paul Travelers Cos.

Under terms of the merger, holders of Travelers Class A and Class B common stock will each receive 0.4334 shares of St. Paul common stock for each share.

Merrill convertible analyst Tatyana Hube said in a report Monday that, post-merger, the Travelers 4.5% convertible notes due April 15, 2032 would become linked to the St. Paul Travelers common shares and the conversion ratio adjusted, although the contingent conversion is not triggered.

Per the issue's prospectus, post-merger, the Travelers convertible will become linked to the St. Paul Travelers common shares at a new conversion ratio of 0.4684, computed by multiplying the old conversion ratio and the merger distribution ratio.

Thus, the conversion ratio would drop from 1.0808 to 0.4684.

The Travelers convertible has no change-of-control put provision, but it does have a contingent conversion trigger based on a merger. However, the contingent conversion trigger should not be activated by this merger, since it is an all-stock transaction. For the trigger to be activated, the stock has to be less than 95% of the total consideration.

Since St. Paul is the acquiring party in the merger, the conversion ratios for its 9% mandatory and 0% convertible notes due 2009 should not face any adjustments.

Hube also noted that the change-of-control put provision on the St. Paul zeros expired in 1999. Before then, the put could have been triggered, since St. Paul shareholders would represent a minority in the merged company.

Merrill's equity analyst Jay Cohen also looked at the merger, from strategic, cultural and financial standpoints.

Strategically, Cohen said in a report Monday that the deal creates a powerful insurance company in the independent agent/broker market, especially in the standard commercial lines, noting the business mix of St. Paul and Travelers is fairly complementary.

"While this certainly does not guarantee success, it does increase our confidence that the two companies' can be merged without major problems arising," Cohen said.

While the companies have historically had different cultures, Cohen said it has been observed that St. Paul chief executive Jay Fishman, since his arrival at St. Paul from Travelers two years ago, has been "Travelersizing" St. Paul. That, he said, amounted to "putting in place a more rigorous financial reporting system and reducing the volatility in the business" by exiting reinsurance.

Financially, Cohen said that simply adding Travelers' earnings to St. Paul and dividing by the new shares suggests EPS accretion of about 3%, without cost savings in 2004. Total underwriting expenses for both companies add up to about $5.7 billion. Assuming about half are non-commission and this can be reduced by 10% to 20% leads to potential cost savings of $285 to $570 million as a very rough estimate.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.