Canopius/Omega - second time lucky?

Could it be second time lucky for Canopius executive chairman Michael Watson?

He has wanted to buy Omega since September 2010, and almost succeeded the following year when he went head to head with Bermudian investment firm Haverford to purchase the ailing Lloyd’s insurer.

Watson lost the battle for Omega to Haverford’s Mark Byrne, but Byrne walked away following a dispute over valuation, leaving the way clear for Watson to try again.

Watson’s chances are good. He knows the business and its shareholders, and they know him. He also has the acquisition firepower. Canopius’s majority shareholder, private equity firm Bregal Capital, has assured Watson that the money is there for the right deal.

Watson has proved himself adept at buying and turning around troubled Lloyd’s businesses. Motor insurer KGM, which Canopius bought in 2010, has shaped up well under his stewardship.

He knew that, deep down, KGM was a good business, and the same is true of Omega. Its recent loss-making years are an anomaly mainly caused by an ill-advised foray into third-party reinsurance at its Bermuda-based subsidiary. The division was only ever intended to reinsure the group itself, and, as it turns out, was ill-prepared to assume others’ risks.

One stumbling block could be the price. Canopius’s 65p a share offer is a 14% discount to 2011 net tangible assets per share of 76p. Shareholders might not like this, particularly as US insurer CNA has recently revealed it is paying a premium to buy fellow Lloyd’s insurer Hardy.

Also Canopius is looking to buy Omega outright, rather than leaving some shareholders the option to share in Omega’s future recovery and make back some of the money they have lost.

On the other hand, many shareholders must be wondering whether the Canopius offer is as good as it is going to get. Before the recent deal talk, Omega was trading around the 50p mark and has since only risen to the 62p mark on the news that buyers are circling. Given the difficult last couple of years, many may be ready to cut their losses and leave Canopius and Bregal to worry about Omega’s future.

As with previous deal attempts, though, much rests on what Omega’s biggest shareholder, Invesco, thinks of the offer. Its 30%stake gives it a big say in Omega’s future, and it has proved decidedly picky when vetting previous suitors.

Still, things have changed since last year’s bidding war. Fourth-quarter catastrophe losses have further eroded Omega’s value, and even Invesco may have grown tired of waiting for things to improve.