Farmers Agrees to Meet With Spurned Suitor : Analysts Say Higher Offer, Mixed Rulings From State Regulators Led to Talks

After months of refusal, Farmers Group reversed course Tuesday and said it is willing to discuss the latest takeover offer of $72 a share from Batus Inc. Responding with pleasure and confidence that a deal will be cut, Batus said meetings will begin in Los Angeles today.

If successful, the $5-billion acquisition would be the second largest ever of a California company, just behind General Motors’ $5.1-billion acquisition of Hughes Aircraft in 1985.

Leo E. Denlea Jr., chief executive of Los Angeles-based Farmers, emphasized that the insurance holding company’s directors made “no decision” whether to accept the deal but added: “We are willing to meet to determine if the new proposal provides a basis for negotiations between the companies.”

In a statement issued from its headquarters in Louisville, Ky., Batus Chairman Patrick Sheehy welcomed Farmers’ change of posture. “We look forward to these face-to-face discussions regarding our offer, which will begin in Los Angeles on Wednesday,” Sheehy said.

Some States Opposed

Batus is the U.S. subsidiary of BAT Industries, a huge British tobacco, retailing and financial-services conglomerate. It has pursued Farmers, which is California’s second-largest homeowners and auto insurer and the nation’s third largest, since January.

Batus’ initial offer of $60 a share was boosted to $63 in March. It remained at $63, or $4.35 billion, until Aug. 9, while the companies dueled with mixed results before insurance regulators in the nine states where Farmers’ insurance subsidiaries are headquartered.

Batus must win approval from insurance regulators in each of those states before the deal can be completed. Coincidentally on Tuesday, Illinois approved Batus’ proposed acquisition of Illinois Farmers Insurance Co., joining Arizona and Ohio on the pro-Batus side.

California Insurance Commissioner Roxani M. Gillespie rejected the bid, but Batus successfully appealed that ruling in Los Angeles Superior Court.

Oregon and Washington denied Batus’ application on various grounds, and decisions have yet to be made in Idaho, Kansas and Texas. Appeals by the unsuccessful parties have been filed or promised in each state.

Cover All Issues

Both the Illinois ruling and Farmers’ announcement came after the close of trading Tuesday. But interest in the deal on Wall Street continued to be strong as more than 2 million Farmers shares changed hands in over-the-counter trading. The stock closed at $63.25, down 25 cents a share.

In his brief statement, Denlea said any discussions with Batus “will have to address” all the issues that Farmers has raised in the various state hearings. These include claims that Batus might end Farmers’ nonsmoker discounts on insurance policies, a charge that Batus has denied.

Batus Chairman Sheehy said the company believes that it meets “the basic statutory requirements of the remaining states where consent is needed. In a friendly negotiated transaction the problems of obtaining regulatory approval should be speedily resolved.”

Batus had attached a Friday deadline for completing the deal, but one analyst noted that “that can and will be changed by a stroke of the pen.”

Several analysts who have followed the hostilities from the outset welcomed Farmers’ change of posture and suggested that it may have been triggered by Batus’ successful appeal in California.

“I think it’s long overdue,” said Gerald S. Haims of Seidler Amdec Securities. “It certainly behooves Farmers management to sit down with Batus. Even if nothing is consummated, it would at the least prevent stockholder suits. A number of stockholders don’t believe Farmers management has been acting in their best interest.”

Haims said he considers the $72-a-share offer for Farmers “quite generous.”

Richard A. Kayne, president of the Los Angeles investment firm of Kayne, Anderson & Co., said Batus’ higher offering price “was enough to catch the attention” of Farmers directors who had called the earlier bids inadequate.

The California reversal and Illinois’ approval Tuesday also were factors in the board’s decision, Kayne speculated.

“I think they are at the point now of talking price and terms,” he said.