Nationwide Mutual Reportedly in Talks to Buy Harleysville

Nationwide Mutual Insurance Co. is in talks to buy Harleysville Group Inc., Bloomberg reported last Friday, citing people familiar with the matter. No information was provided with respect to timing, structure or price.

The talks are ongoing and the two sides are still days away from reaching any definitive deal. According to the report, the talks could still fall apart.

Nationwide Mutual is not talking about any talks with Harleysville. Asked to confirm the talks are underway, Joe Case, associate vice president for corporate communications at Nationwide Mutual, declined comment. “As an ongoing part of doing business, we review potential opportunities that come to our attention, but we are not in a position to publicly comment or speculate on those opportunities,” he told Insurance Journal.

Harleysville Group also declined to comment on the report.

If a deal is reached, Nationwide would likely pay a premium on the book value of Harleysville, according to RBC Capital Markets analyst Mark Dwelle, who said there is currently no pressing need for Harleysville to be looking for a suitor.

“Apart from the opportunity to obtain a good price for sharholders, there is no fundamental need for Harleysville Group to be a seller. The company is profitable, well capitalized and has an assortment of options as far as management succession and business growth opportunities, in our view,” analyst Dwelle stated in his research note.

Within the last year, Harleysville shares have traded between 90 percent and 140 percent of book value, which is fairly consistent with the range seen over the last three to five years, according to the analyst. “We would think that an acquirer would need to offer something near the top end of this range in order to complete a deal. ” At the company’s June 30, 2011, book value of $28.81, this would imply a price of perhaps $35 to $40 per share.

Harleysville shares are enjoying a strong bounce in wake of the merger report. Its stock, listed on NASDAQ, is trading at above $30 per share this Monday morning. Just last Thursday, shares were trading at below $27.

Harleysville is 55 percent owned by a mutual insurance company, Harleysville Mutual. And the remaining 45 percent constitutes the entire public float. As such if the board of Harleysville Mutual agrees to a deal, there are few ways that the deal could be countered as the Mutual has the necessary votes to block any proxy, according to analyst Dwelle.

He said Nationwide would be a plausible buyer in as much as they are also a mutual insurance company which would facilitate integration and regulatory approval. It would also imply a cash takeout for public shareholders, an easily arranged amount given Harleysville’s $688 million market cap.