News Column

Proposed National Interstate buyout gets messy

February 22, 2014

By Jim Mackinnon, The Akron Beacon Journal

Feb. 22--Alan Spachman, who founded insurer National Interstate in 1989, says he has significant reasons for not liking the proposed $285 million buyout of the Richfield-based business.

He alleges in Securities and Exchange documents that majority shareholder American Financial Group manipulated National Interstate's finances last year in a way that lowered its stock price. That, among other things, in turn allowed AFG to propose a low per-share offer earlier this month -- well below the company stock's 52-week high, Spachman said.

"They picked a very opportunistic time to do it," said Spachman, 66, who remains a director with the specialty insurance company and one of its largest shareholders. He filed documents with the Securities and Exchange Commission this week opposing the buyout proposal and urging stockholders not to tender their shares.

Cincinnati-based American Financial Group, which owns 52 percent of National Interstate, or 10.2 million shares, said Feb. 5 it wants to buy the remaining 48 percent of the company. It has since raised its initial offer from $28 a share to a "best and final price" of $30. The offer expires March 6.

A lawsuit filed Feb. 19 in Summit County Common Pleas Court seeks to delay the buyout process and claims, in part, that six members of National Interstate's 10-person board have conflicts of interest and have breached their fiduciary duties. The lawsuit, filed by Cambridge Retirement Systems of Cambridge, Mass., seeks class-action status and also seeks an extension of time for the tender offer.

Other law firms have issued statements saying they are investigating the buyout proposal.

Neither National Interstate nor American Financial Group returned telephone calls Friday seeking comment. This week, National Interstate said its board voted 6-4 not to offer an opinion on the buyout.

Spachman said he's not opposed to a buyout but that the process needs to be open and independent.

"It's not my concern they're trying to buy the company," Spachman said. "I'm on record saying it could be a good thing."

The current process hurts small shareholders, Spachman said. "It's not illegal. I'm alleging it's not the best way."

SEC documents filed by Spachman, National Interstate and American Financial Group show how National Interstate board members disagreed on the buyout process and offered insights into internal company matters.

National Interstate's board of directors should have appointed a committee of independent directors to review the buyout proposal and look out for the minority shareholders, Spachman said.

"That's not what happened here," he said. "In many states what they are trying to do would not be allowed."

But Ohio law, written in the 1980s to ward off outside corporation takeover attempts, does allow this kind of insider process, Spachman said.

Five of the company's 10 directors are current or former employees of American Financial Group. A sixth director also is not considered independent, Spachman said.

"You have a board with six conflicted people on it," he said. "It doesn't sound like a level playing field. It isn't a level playing field."

Ohio law also allows a "forced merger" if a company acquires 66 percent of outstanding shares, Spachman said. "Then it becomes what is called a squeeze-out merger," he said. "There's nothing that protects the guy who doesn't tender."

What he wants National Interstate to do is stop the process, appoint the committee of independent directors and then get what he said should be a fair offer.

Spachman declined to say what he thinks would be an appropriate buyout offer. His 1.82 million shares of National Interstate are worth $54.6 million at $30 a share.

He said typically these kinds of buyouts are done with prices above the 52-week high. In National Interstate's case, the 52-week high was $35.68 on July 17.

"If they want to pay a fair price, I want them to buy the company," Spachman said.

National Interstate and American Financial Group had a "wonderful relationship" for 24 years, Spachman said. But something changed a year ago, he said.

American Financial Group forced National Interstate to make changes to reserves it held, which in turn hurt the Richfield company financially and resulted in share prices falling 18 percent, Spachman said.

In addition, National Interstate on Jan. 30 released preliminary fourth-quarter and year-end results, which is a departure from what the company did historically, he said. The stock price declined by about 5 percent after those results were released, he said.

American Financial Group made what amounted to a $50,000 investment around 1990 to buy half of National Interstate, Spachman said. "They don't have a quarter of a million dollars invested in this company," he said.

Fledgling National Interstate benefited from the partnership because AFG was able to help the company quickly expand beyond Ohio, he said.

"They promised us independent operations, hands off. We agreed to do it," Spachman said. "In retrospect, it was a good decision."

The small amount of money AFG spent to buy half of National Interstate probably was the best investment AFG ever made, Spachman said.

Based on Friday's $29.95-per-share closing price, AFG's $50,000 investment has grown to be worth about $300 million.

Jim Mackinnon can be reached at 330-996-3544 or jmackinnon@thebeaconjournal.com.

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Source: Akron Beacon Journal (OH)


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