PartnerRe shareholders should vote to go with AXIS: KBW analysts

The future for reinsurance firm PartnerRe will be decided by its shareholders on the 24th July, when they are asked to vote whether the firm should merge with AXIS Capital. Analysts at KBW said yesterday that shareholders should, and likely will, vote yes.

In this three-way tussle between PartnerRe, AXIS and Italian holding company and investment house Exor, the war of words stepped up again yesterday when it became clear that Exor had filed a lawsuit against PartnerRe.

Exor claims that the PartnerRe board had refused to share shareholder details, details that Exor wants so that it can communicate directly with shareholders in advance of the vote, so that it can explain its offer to them.

PartnerRe responded saying Exor’s claim was “without merit” and that it believes it has acted in-line with its obligations regarding shareholder disclosure under Bermuda and U.S. laws.

It must be tough for the shareholders to know what to do for the best.

The combination of PartnerRe and AXIS Capital creates a much larger powerhouse of a diversified insurance and reinsurance company, which may cope much better with market conditions and ultimately gain in book value and return more profit to them.

At the same time, the all-cash buyout offer from Exor values PartnerRe at a premium today, would allow shareholders to exit their investment at a time when the reinsurance market is challenged and essentially create a clean break opportunity for shareholders.

Some external guidance is helpful at times like this and that’s exactly what analysts from Keefe, Bruyette and Woods have provided. Led by Meyer Shields, the highly-respected analysts explain that they now feel that the shareholders should, and likely will, vote to go with AXIS.

While the expectation at KBW is that the vote will be close, they believe that choosing the merger with AXIS Capital is the right way to go for the reinsurance firm’s shareholders.

KBW’s analysts explain:

1. Based on AXS’s current valuation, its merger offer only represents a modest (4.3%) discount to the EXOR offer. Aggressive capital management action plans, credible expected expense synergies and other sources of ROE enhancement, and both companies’ persistently strong reserves should forestall any multiple deterioration stemming from the forgone ~$300 million break-up fee.
2. Although PRE’s common shareholders won’t have any exposure to its future performance following a sale to EXOR, we think PRE’s preferred shareholders (who represent about 41.7% of the vote) will prefer the AXS-PRE combination, because of the strategic merits of the combined company in what will probably be an increasingly challenged reinsurance environment, and because of concerns over EXOR’s higher debt leverage.

The analysts met earlier this week with AXIS CEO Albert Benchimol and PartnerRe Board Chairman Jean-Paul Montupet and said that; “After reviewing their presentations and EXOR’s most recent response, we think that the voter breakdown and the merits of the combination both should and will produce a (probably slim) majority vote in favor of the amalgamation.”

The analysts believe that PartnerRe’s share price seems more aligned with the valuation that is implicit in the merger with AXIS, rather than with Exor’s offer valuation. This leads the analysts to believe that the markets expect the AXIS offer will prevail.

KBW says that the AXIS combination is compelling enough to make common shareholders reject the Exor cash offer and for the preferred shareholders there is an expectation that most would vote for the AXIS route anyway, as they don’t receive any of the premium from the Exor offer.

KBW expands; “As far as we can tell, the only strategic advantages of the EXOR offer to preferred shareholders are the theoretical benefit of remaining a pure-play reinsurer and therefore avoiding competing with cedants, and the planned retention of capital compared to AXS’s more aggressive capital return plans.”

However the benefits of being a larger, more diverse, insurance and reinsurance business will surely outweigh the ability to continue as a standalone reinsurance company in the current market environment. Unless of course Exor decided to adjust the asset side strategy, which could give a standalone reinsurer an edge, but the investor said that it would not do that.

KBW concludes; “After reviewing the more thorough presentation supporting the benefits of the AXS-PRE merger along with EXOR’s June 3 response, we’re revising both our expectation and our recommendation to PRE shareholders. While the vote will probably be close, we think that AXIS will ultimately prevail, and perhaps more importantly, we think that the potential upside outweighs the modest discount embedded in AXS’ share price compared to EXOR’s cash offer.”

For the full story see our previous articles, most recent first:

– PartnerRe says Exor’s lawsuit claims “without merit”.

– Exor sues to gain access to PartnerRe shareholder details.

– PartnerRe-AXIS : $60m fees from third-party reinsurance capital by 2017.

– EXOR welcomes PartnerRe shareholder vote, Sandell questions Board.

– PartnerRe rejects EXOR again, to proceed with vote on AXIS merger.

– EXOR says will engage with PartnerRe board, but not on price.

– AXIS prepared to go it alone if PartnerRe deal breaks up.

– PartnerRe board wants improved EXOR bid, or it’s back to AXIS.

– AXIS unlikely to sweeten PartnerRe offer to match EXOR: Reuters.

– Shareholders hold key to PartnerRe’s future, EXOR bid preferred.

– EXOR increases offer for PartnerRe, becomes largest shareholder.

– Exor to consider increasing bid for PartnerRe, reports.

– AXIS, PartnerRe committed on merger. EXOR commits to its offer.

– Major shareholder prefers EXOR’s bid for PartnerRe over AXIS’.

– EXOR bids $6.4B for PartnerRe, to get into reinsurance.