French Firm Denies Junk Bond Strategy

Axa Midi Assurances, the French insurer that would buy Farmers Group if the Los Angeles firm’s parent is taken over, denied Monday that it would finance the acquisition with junk bonds, as critics have claimed.

Axa Midi, based in Paris, intends to finance its purchase through a combination of cash and commercial bank loans, it said.

Axa Midi has agreed to pay $4.5 billion to Sir James Goldsmith’s consortium, Hoylake Investments, if it succeeds in taking over London-based BAT Industries, parent of Farmers Group. The deal would be worth about $22 billion, history’s second-largest. BAT has maintained that Axa Midi would pay for Farmers by issuing high-yield, high-risk corporate bonds and saddling the company with debt.

“There are no junk bonds involved in this transaction,” insisted Axa Midi’s chairman, Claude Bebear.

Financing Strategy

Axa Midi, Bebear said, intends to pay $1 billion in cash “from our own internal resources,” add another $1.25 billion two years later and finance the rest of the purchase price with 10-year bank loans. Moreover, he added, the loans will not be placed on Farmers’ books, nor will Farmers’ shares be used as collateral.

In addition, he said, Axa Midi carries no debt and is assigned a AA+ financial standing by Standard & Poor’s, the U.S. bond-rating firm.

Bebear spelled out the financing strategy in a letter to California State Sen. Alfred E. Alquist (D-Santa Clara), the text of which was released Monday. Alquist and 59 other legislators had earlier written to state Insurance Commissioner Roxani Gillespie to express concern over Farmers’ future if Hoylake succeeded in taking over BAT. Gillespie and regulators in eight other states where Farmers’ subsidiaries are headquartered must approve changes in ownership of insurers based within their boundaries.

Goldsmith has sought to have federal courts preempt state regulatory authority over the deal, which Hoylake argues is an international transaction. But Bebear said in his letter that Axa Midi considers Goldsmith’s approach wrong and “urged him to withdraw these law suits. We are willing to conform to all U.S. regulations.”

In his letter, Alquist had claimed that Axa Midi’s purchase of Farmers from Hoylake would “immediately burden Farmers with $4.5 billion in debt.”

SEC Review

BAT has repeated that view since Axa Midi agreed a month ago to buy Farmers from Hoylake as part of Goldsmith’s plan for BAT to concentrate on its traditional tobacco business and sell off everything else. BAT last week countered with its own, less radical divestment plan, which would also keep the company’s financial services interests.

Meanwhile, in Washington, the staff of the Securities and Exchange Commission completed a review sought by Congress by finding that the agency has no authority over Hoylake’s bid for BAT, which excludes the 5% of shares held in this country as American depository receipts.