State Auto Financial (NASDAQ:STFC), a regional insurance provider, nearly tripled in yesterday's trading on the strength of over 66 times normal trading volume. The company slipped slightly going into this morning's trading but recovered quickly. The reason behind this jump features Liberty Mutual's announced plans to buy the company at a substantial premium over its recent trading. Financial analysts are urging investors to buy in even as the price targets haven't been modified in light of recent news. There's also some unusual options activity underscoring the deal to bear in mind.
State Auto Financial Proves a Screaming Buy for Liberty Mutual
State Auto Financial, which focuses on property and casualty insurance, proved deeply attractive to Liberty Mutual. Before yesterday's announcement, Liberty Mutual was already State Auto Financial's primary shareholder, holding 58.8% interest in the company. Now, it will step up to completely own the company as well.
Liberty Mutual, a privately-held company whose policyholders are effectively shareholders, agreed to purchase State Auto Financial for $52 per share. Given that State Auto Financial had been trading around the $20 mark for the last six months, this was a massive premium, and sent the stock rocketing upward to hit nearly three times its closing price on Friday. Liberty Mutual bought in as a way to augment its presence in “...domestic personal lines and small commercial business,” a press release noted.
By acquiring the State Auto Financial Corporation, Liberty Mutual gets access to a huge new block of policyholders. Liberty Mutual will be buying into a network of around 3,400 independent agencies throughout the United States—33 states, at last report—that yields $2.3 billion in annual premiums.
The massive premium Liberty Mutual was willing to pay led to very little resistance from State Auto Financial's board of directors, though the move must also clear member's and shareholders' scrutiny as well.
How Do Financial Analysts Feel About State Auto Financial Stock?
Right now, the sheer scope of the deal and massive premiums involved aren't deterring financial analysts, who have a consensus “buy” rating on the company. That rating is comparatively new, as it changed over from a “hold” rating back in March.
A year ago, the company had one “buy” rating and two “hold” to its credit. That ratio held true until March, when it shifted to one “buy” and one “hold”, which it held through to mid-June, when the ratio shifted once more to just one “buy” rating. Today, we're back to where we were in March, with one “buy” and one “hold”.
The State Auto financial price target, which remains stable despite the new floor established by the Liberty Mutual deal, currently sits at $18. With two price targets on hand—Sidoti's $18 outright from October 2020, and Piper Sandler's recently-lowered price target from $20 to $18 back on July 9—the $18 price target isn't an average but rather a consensus. This would have been a noteworthy point if not for Liberty Mutual's buyout offer.
There's another point of less formal stock analysis to consider, as State Auto Financial was the subject of some major options buying in the wake of the announcement. Oddly enough, these were “put” options, which were bought in a wildly incongruous fashion. Normally, about 15 put options are bought in State Auto Financial stock every day. Yesterday, that number went to 6,178, which is just over 41,000% higher than normal.
Additionally, news emerged that WeissLaw LLP is currently investigating the deal, including “...possible breaches of fiduciary duty and other violations of law by the board of directors of State Auto Financial Corporation in connection with the proposed acquisition of the Company by Liberty Mutual Holding Company.” On a more positive note, AM Best revealed that the credit ratings of Liberty Mutual Insurance Companies, Liberty Mutual Holding Company Inc., and Liberty Mutual Group, Inc. all remain unchanged after the agreement to buy State Auto Financial was announced.
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