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NBIC not a defensive deal for Heritage Insurance, analysts say

Heritage Insurance Holdings Inc.'s pending acquisition of NBIC Holdings Inc., the parent company of Narragansett Bay Insurance Co., is not a "defensive" one, according to equity analysts watching the deal.

On the company's second-quarter earnings call, Heritage Insurance Chairman and CEO Bruce Lucas said that another company picking up NBIC would have put Heritage Insurance at a "significant disadvantage."

But analysts affirmed that the acquisition was four years in the making, and it was likely to go Heritage Insurance's way all along.

"If you view that statement Bruce made in the lens of their M&A strategy, it would have put them at a disadvantage, because they identified two properties that they wanted to have," Sandler O'Neill analyst John Barnidge said in an interview. The deal was less of a defensive acquisition than simply following through on a strategy to diversify the company, the analyst said.

"There's not that many properties like Narragansett out there that are multi-state, that are property, that are heavily reliant on reinsurance where there will be a lot of cost-savings by bringing in a lot of non-correlated risk," Barnidge said.

Lucas said during the conference call that Heritage Insurance had been interested in purchasing NBIC since 2014. The company had identified Zephyr Insurance Co. Inc. and NBIC as targets to expand more quickly than growing organically and chose to pursue Zephyr first, analysts said. It announced the Zephyr deal in 2015 and looked to the future for NBIC.

In 2016, the company sold $79.5 million of its senior secured notes due 2023 to fund the eventual purchase of NBIC, Barnidge said. Heritage Insurance is paying $250 million for NBIC, subject to post-closing adjustments, broken down into $210 million in cash and $40 million in common stock.

The $250 million valuation for NBIC, Keefe Bruyette & Woods equity analyst Arash Soleimani said in an interview, was a fair price for Heritage Insurance to pay.

"At first glance, it definitely looks expensive, especially when you look at it as a multiple of book," Soleimani said. But the deal's price is not unlike similar acquisitions, he noted He pointed to transactions like Progressive Corp.'s deal with ARX Holding Corp., completed in 2015 for $877 million, that had a fair price.

Barnidge also said the deal was fair given the potential for future earnings. Heritage Insurance expects the deal to be immediately accretive to earnings per share and return on equity.

The deal is expected to close in the fourth quarter of 2017.