Deep South Deal Goes South

Managing general agency Deep South Holding, L.P., said a proposed deal in which it would be acquired by North American Insurance Leaders Inc. for $110 million has been scrapped.

A majority of the stockholders of North American Insurance Leaders, a New York-based publicly traded special purpose acquisition corporation, voted against buying the Irving, Texas-based MGA at an annual meeting Tuesday.

Reacting to the vote, North American announced that because it will not be able to complete the deal, the acquisition firm may go into liquidation.

The North American board of directors said it is now considering alternatives that may be in the best interests of its stockholders, “including the adoption of a plan of dissolution and liquidation in accordance with applicable provisions of Delaware law.”

Formed in 2005, North American Insurance Leaders described itself in an initial filing with the Securities & Exchange Commission as “a blank check company…formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, capital investment, stock purchase and/or other similar transaction with one or more insurance-related businesses in North America.”

North American Insurance Leaders raised net proceeds of approximately $110 million through an initial public offering in March 2006, led by CRT Capital Group LLC.

Deep South is a full-service distributor of commercial insurance products operating via 12 offices located throughout the United States–mainly in the South, but also including a branch office in Ohio serving the upper Midwest.

According to the MGA's Web site, www.deep-south.com, commercial insurance products include its primary product–commercial auto insurance–as well as commercial property and liability packages and inland marine coverage.

Founded in 1967, Deep South had been marketing its products through more than 2,000 independent agents located in 24 Southern states until February of this year, when it announced a territorial expansion into the mid-Atlantic and Northeast. In mid-February, Deep South announced that it had reached an agreement with QBE Americas Group to expand marketing into 12 new states and the District of Columbia.

Responding to the thumbs-down vote on the deal Tuesday, Deep South President David Disiere, said, “It is apparent the very weak public financial market conditions weighed heavily on the decisions made by the current NAIL stockholders.”

“In its 41-year history, 2007 was Deep South's best year in terms of earnings and underwriting profitability, and the company is uniquely positioned for continued growth and profitability into the foreseeable future,” he said in a statement.

In fact, the year's earnings apparently moved the purchase price up from an original estimate of $110 million, which was based on a preliminary estimate of 2007 earnings made in August 2007.

Terms of the agreement, signed on Aug. 10 2007, called for North American Insurance Leaders to pay 5.94-times 2007 EBITDA (earnings before interest, taxes, depreciation and amortization) for the MGA initially in cash and stock–estimated at the time to be $110 million.

Additionally, Deep South shareholders would have had the opportunity to receive up to $65 million in cash and stock depending on the future financial performance of the acquired company over the two years following closing, according to the initial deal terms.

Late last week, North American Insurance Leaders announced that a preliminary review of year-end financials revealed that the governing EBITDA would fall in a range from $18.8-to-$21.5 million, putting the initial purchase in the range of $111.9-to-$125 million.

North American Insurance Leaders also said, however, that its review of some financial results for this year so far revealed the written premiums for the first two months were under budget.

The acquisition firm said that Deep South's premiums were $22.2 million in January, or nearly $1.5 million under budget, and $15.6 million in February, or $2.6 million under budget.