In the brief few days since last I wrote, there have been eight SEC filings and a Wall Street Journal article on the tender.
The new information strongly supports the conclusion that the squeeze-out:
- materially undervalues the company, and
- doesn't meet criteria of fairness to the minority, whether in price, process, intent, or result.
The documents also strengthen my inference that National Interstate's (NASDAQ:NATL) published loss reserves are not reliable for valuation, may reflect Purchaser's (vs. Management's) best estimates, and are likely overstated.
In balance, I offer the following cautionary remarks:
The documents describe the most aggressive overreach by a majority owner (American Financial Group, NYSE: AFG, "Controller") I've seen in my investment career. Controller has provided written intent to achieve a super-majority, a delisting, or change the Articles of Incorporation to eliminate cumulative voting in the event the Tender is unsuccessful. Readers should think long and hard about suitability.
Still, in my experience, it is precisely when something within reach becomes very valuable, the largest entity in the room becomes the most aggressive. I intend to stick around and discover what's behind the behavior.
With that caution in mind, we return to our story.
A Review through February 20th
National's Board ("Board") consists of ten members; six affiliated with the purchaser inclusive of the CEO, and four independents, including the Founder (Alan R. Spachman) and his son.
On February 5, 2014, AFG (with 51.7%) initiated a two step transaction for the remaining public shares, consisting of a tender to 90%, followed by a back-end merger. Terms were $28 per share in cash.
On February 7th, the Board rejected a request by the Founder to form a Special Committee and hire independent advisors.
On February 10th, the Board instead retained Duff & Phelps to provide a fairness opinion, though splitting on this decision along affiliate/independent director lines.
On February 17th, Duff & Phelps opined that the "the consideration to be received by the public shareholders of the Company in the Proposed Transaction is not fair from a financial point of view to such shareholders."
At this point, according to filings, a Director affiliated with the Controller offered to raise the bid to $30 per share, if the Board were to disseminate a neutral, vs. an adverse opinion.
Published accounts differ, but suggest Duff & Phelps resigned rather than continue their engagement, or offer an opinion on the improved price.
On the morning of February 18, AFG publicly raised its bid to $30 per share in cash, representing it was both best and final.
The Board reconvened later that day to vote on delivering a Neutral recommendation to that bid, but the vote was split six to four along affiliate/independent lines.
Two competing 14D-9s were subsequently filed. One representing the affiliates, the other representing the dissenting views of independent Director Alan Spachman.
The majority filing expressed no opinion on the deal, while the latter recommended shareholders not tender.
A Brief Interlude on Loss Reserves and Insurance Accounting
Readers familiar with the subject or uninterested can safely skip this section.
Cash is a restless thing. It's always either
- on its way in,
- just arrived,
- preparing to leave, or
In an insurance company, cash arrives in the form of premiums and investment income, and leaves to pay claimants (the people who have gotten into accidents).
Turning to the last two categories, preparing to leave or gone:
When it seems likely, based on past experience, that a pile of cash is preparing to leave, an insurer will record a liability against it. This liability is called a loss reserve. Its creation reduces equity (recall that Assets less Liabilities equals Equity).
But sometimes the cash never leaves. It sticks around! This is a happy outcome.
There are a couple of reasons for this. Occasionally the claimants are willing to take less money for a faster settlement. Sometimes the estimates were just too high.
At the end of the day, loss reserves are just a guess.
When, in the fullness of time, the guess proves too big, the reserves are reduced. This is called "favorable loss development."
Such favorable development increases shareholders' equity, more commonly called "book value" or "book."
Since the market value of insurers is commonly based on multiples of book, the company is worth more.
Now back to National.
National's Loss Reserves: Management's Best Estimates or Purchaser's?
In our last piece, we discussed the accounting treatment of the Vanliner loss reserves. A new issue has been disclosed.
On Feb 19th, the Founder made an assertion in an SEC filing regarding a change in how loss reserves were computed during 2013, and the subsequent effect on earnings.
I quote the paragraph in its entirety:
In particular, Mr. Spachman notes that the Share price was negatively affected by reserve increases made by the Company during 2013. For many years, Purchaser has provided actuarial services for the Company. As part of these services, Purchaser has reviewed the adequacy of the Company's loss reserves. Until 2013, Purchaser opined on the adequacy of the Company's loss reserves only after the Company had closed its books for each financial quarter. In 2013, however, Purchaser's actuaries began to recommend significant changes to the Company's loss reserves for the prior quarter before the Company announced its financial results for that quarter. This new process was implemented by management without advance review by, or knowledge of, the Company's full Board or Audit Committee. As a result of this new process, loss reserve deficiencies were reported, and reserves increased, in the second, third and fourth quarters of 2013. 
More disclosure from the Company should be provided on this topic.
National: M&A Infinite Improbability Generator
Douglas Adam's Hitchhiker's Guide to the Galaxy describes the Infinite Improbability Generator, a device near which incredibly unlikely events occur with great frequency.
National seems to have one in their boardroom.
For reference, here's a list of events you just don't often (actually, ever) see in corporate M&A.
In chronological order:
- Request to form Special Committee rejected.
- Financial Advisor opines Tender is financially unfair.
- Financial Advisor abruptly resigns.
- Board disregards 'Unfair' opinion, adopting Purchaser-requested 'Neutral' stance by split vote.
- Competing Form 14D-9s are filed with the SEC on the same day, one expressing no opinion, one recommending against tendering shares.
- Multiple Directors discuss dispute in national media.
- Allegations of Accounting Shenanigans by Purchaser, made by Director in an SEC filing.
And the night is still young!
Why the Rush?
Why the drama? Last I checked, the Academy of Motion Picture Arts and Sciences doesn't yet recognize scenery-chomping overacting in a Boardroom as an Award category.
Are things not as bad as loss-reserves might indicate? Is the future perhaps, brighter than the past?
I don't know. In the absence of the tender, the next two major events in National's life would be release of the 2013 Form 10-K with loss-development triangle (which would shed some light both on magnitude and origin of Q2, Q3, and Q4 reserve strengthening) and the expiry of the Vanliner collar.
My purely speculative conjecture is this if either of those two events were at all adverse to valuation, Controller wouldn't be in a rush to go private ahead of them.
What Should Happen Next?
If you're a shareholder, don't tender.
Shareholders who still want to transact with the Controller should, as a prerequisite, demand an independent audit of the loss reserves to serve as a reliable basis for valuation.
It would certainly be useful to know what the original 2013 Q2, Q3, and Q4 loss reserve and earnings numbers were before the purchaser admittedly reviewed and allegedly made discretionary alterations without the knowledge of National's full Board or Audit committee.
I don't understand how behavior like that falls into any safe harbor, in any domicile. Courts show great deference to Management's estimates, not those of a Purchaser.
Even in Ohio, Directors have a fiduciary duty of loyalty to the corporation, not their employers.
The original loss reserve numbers, and alterations, if any, should be shared with all shareholders without further delay. The data has no competitive relevance or proprietary value and should be publicly released.
The National's Audit Committee has responsibilities here independent of whether a transaction is ongoing. The matter should be investigated and resolved.
People with Better Access to Information Keep Telling Us The Company is Worth More:
From the public disclosure and many, many filings, it has become clear that everyone who has gotten a private look at National's books and records in that boardroom tells a story of a company that is worth so much more than its market price. Duff & Phelps, Spachman, AFG: everyone is saying the same thing, if we just listen carefully.
It's just the shareholders who are being kept in the dark about what their company is worth.
It's time for this to stop.
In sum, more disclosure to shareholders, please.
 Tender Offer for Insurer Divides a Boardroom, Wall Street Journal, Feb. 20, 2014.
 National SC TO-T, filed Feb 5, 2014. See: Special Factors, item 7 - Effects of the Offer if Purchaser Waives the Minimum Tender Requirement and Purchases all Shares Tendered in the Offer, p. 13.
 National Form SC 13D, Filed Feb 14, 2014 by Alan R. Spachman, Item 4, p 4.
 Majority Opinion, National SC 14D9, filed Feb 19, 2014. p 4.
 Ibid, Exhibit (15).
 Dissenting National SC 14D9, filed Feb 19, 2014. p 3.
 WSJ: "Duff & Phelps considered that move inappropriate given Mr. Consolino's access to their analysis, according to Messrs. Spachman and Schiavone. That prompted the firm to resign its role as the company's adviser"
 Dissenting National SC 14D9, filed Feb 19, 2014. p.4.
 Dissenting National SC 14D9, filed Feb 19, 2014. pp.4-5. Emphasis in the original.
 National SC TO-T/A2, filed Feb 21, 2014 p. 9.
 Dissenting National SC 14D9, filed Feb 19, 2014. pp.4-5.
 See for example, Ohio General Corporation Law 1701.59.
National Interstate Corporation (NASDAQ: NATL)
Great American Insurance Company (private)
American Financial Group (NYSE: AFG)