Leucadia Backs Out of Planned Reliance Deal

Leucadia National Corp. backed out of its acquisition agreement with Reliance Group Holdings Inc. on July 13 under the deal’s current terms. The planned $293-million stock swap was first announced May 26.

The companies are reportedly discussing alternatives to the agreement penned prior to Reliance selling off chunks of its property/casualty business last month.

Matthew Coyle, an analyst with Standard & Poor’s, said the likelihood that a deal can be meted out will rely heavily on what Leucadia believes it has to gain from buying what is left of Reliance.

“To proceed or not to proceed, that is the question,” Coyle said. “The two variables, ultimately, are: what is Leucadia going to be buying; and what is going to be left?”

Coyle said further piecemeal sales are definitely something t

o watch for while Leucadia mulls over a purchase. Reliance’s international business could be the next unit offered up for sale, he said, adding: “at this point, I think it’s fair to assume everything’s on the table.”

A.M. Best Co. has downgraded the financial strength rating of Reliance Insurance Group to “B” (Fair) from “B++” (Very Good). The p/c group’s rating remains under review with developing implications. The downgrade applies to the group’s 13 domestic members and is just the latest in a string of difficulties experienced by the company over the last several weeks.

Standard & Poor’s (S&P) lowered Reliance’s rating July 7 because of increasing concerns that the company will fail in its efforts to refinance more than $500 million in debt obligations, which mature in August and November. Also, the company continues to divest itself of key businesses, which S&P believes weakens the company’s ability to generate the necessary liquidity to meet its ongoing obligations. Another important consideration is that Reliance retains the run-off of reserves on the businesses it has sold.

Meanwhile, Reliance Group Holdings is defending a lawsuit claiming that shareholders were harmed by company actions that resulted in falling stock prices.

Late last month, the law firm of Wolf Haldenstein Adler Freeman & Herz LLP filed a class action suit on behalf of Reliance Group Holdings security purchasers who bought between Feb. 8, 1999, and May 10, 2000. The action is pending in U.S. District Court in New York.

Along with the company, Saul Steinberg, chief executive officer and director; Robert Steinberg, president and chief operating officer; Howard Steinberg, chief of corporate operations; and Lowell Freiberg, chief financial officer and director, are named as defendants.

The complaint alleges that on March 31, 1999, in the financial statement filed with the SEC for fiscal year 1998 operations, the defendants claimed the company’s reinsurance contracts were valid, and recovery of the full amount of such coverage was expected. The lawsuit asserts that the company’s losses for that time period actually exceeded $150 million, and the loss should have been reflected as a charge to income.

The suit goes on to assert that in May, the company reported its first fiscal 2000 quarter would see an operating loss of $.31 per diluted share, representing a greater loss than the same quarter 1999. The company’s stock closed that day at $2.62, a decline of more than 40 percent from the period high of $11 per share.

Just prior to the announcement of the suit, Reliance began selling off insurance units piecemeal, first to The Hartford Financial Services Group, then to Kemper Insurance Cos.

On June 19, The Hartford announced it had agreed to purchase Reliance’s D&O, E&S and inland marine units for an undisclosed amount. The following day, Kemper announced it would acquire the renewal rights to a portion of Reliance National’s book of business.