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Donegal Group Inks Deal to Sell Donegal Financial Services

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Donegal Group Inc. (DGICA - Free Report) along with Donegal Mutual Insurance Company recently announced to divest Donegal Financial Services Corporation and its wholly owned unit, Union Community Bank, to Northwest Bancshares, Inc. (NWBI - Free Report) in a cash-stock deal. The divestiture will help the insurer intensify focus on its core property and casualty (P&C) insurance business. Donegal Group has 48.2% stake in Donegal Financial Services Corporation. The transaction is expected to culminate in the first quarter of 2019 pending closing conditions.

Notably, this sell-off signifies the culmination of a banking investment strategy, which started with the formation of Donegal Financial Services Corporation in 2000.

Financial Considerations

Before the completion of the merger, Donegal Financial Services will pay a dividend amount of $30 million to Donegal Group and Donegal Mutual Insurance, immediately.  Therefore, the total proceeds will be nearly $115 million.

As mentioned earlier, per the agreement, Northwest Bancshares will pay the consideration — 50% in cash and 50% through stock — with the stock portion consisting of a fixed exchange of 137.84 acquirer’s shares for each of Donegal Financial Services’ 0.02 million outstanding shares. The exchange ratio was made on the basis of Northwest Bancshares’ 10-day trading average share closing price, of $17.26, which ended Jun 4, 2018.

Nonetheless, the exchange ratio will shift to a floating basis if the share price of Northwest Bancshares during a period ending the fifth trading day prior to closing falls below $15.53 or moves above $18.99. This will ensure the total purchase price to remain in the $80.75–$89.25 million range. In fact, Northwest Bancshares also has the right to alter the consideration mix of the value of the acquirer’s shares during the calculation period if it falls below $15.53.

From a financial standpoint, Donegal Group will receive about $14.5 million in dividend with ranging between $38.9 million and $43 million from Northwest Bancshares.  Donegal Group estimates an after-tax gain, net of transaction-related expenses, between $8.9 million and $12.5 million or about 32 cents -45 cents per Class A share post the divestment.

Donegal Group’s shareholders are expected to benefit from this transaction as the P&C insurer hopes to lend adequate support to its strategic objectives while improving its core P&C business. On the other hand, the transaction will enable Northwest Bancshares to enhance its abilities and opportunities to better serve its clients as well as the employees of Union Community Bank. Further, the buyout will allow the acquirer to extend its footprint in Lancaster County, PA and beyond and offer its clients a wide range of products and services.

Zacks Rank and Share Price Movement    

Donegal Group carries a Zacks Rank #5 (Strong Sell). Shares of the company have lost 17.4% year to date, wider than the industry’s decline of 1.3%. We wait to see if the company’s initiatives to focus on core business help the stock turn around after the deal's closure.



 

Stocks to Consider    

Some better-ranked stocks from the insurance industry are Alleghany Corporation (Y - Free Report) and NMI Holdings, Inc. (NMIH - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.

NMI Holdings provides private mortgage guaranty insurance services in the United States. The company came up with positive earnings surprises in three of the last four quarters with an average beat of 24.55%.

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