Enhanced PartnerRe – AXIS terms weaken merger rationale: Analyst

The enhanced terms announced yesterday by reinsurance firm PartnerRe and insurer and reinsurer AXIS Capital continue to “weaken the thesis and rationale” behind the original merger announcement, according to analysts at Macquarie Research.

In the enhanced merger offer the two firms announced a $6 per share increase in the pre-closing special dividend, taking it from $11.50 to $17.50 per share.

Analysts at Macquarie, led by Amit Kumar, explained in a note yesterday that the dividend enhancements come from future capital management actions, and while looking attractive on the surface, they weaken the rationale behind the PartnerRe – AXIS insurance and reinsurance merger deal.

At closing the enhanced dividend now means that the merged company, dubbed NewCo, will disburse approximately $837m through the special dividend.

This figure has been rising steadily throughout this process, with the latest hike in dividend meaning that a substantial amount of capital will be immediately paid out by NewCo. It also means that planned share buybacks will be reduced.

The analysts also note that the enhanced offer terms are worth approximately $138.08 per share, based on AXIS’ closing price yesterday, versus EXOR’s $137.50 all-cash offer per share.

However the value is not as clear cut, as there is a 52% to 48% split, meaning that AXIS shareholders will absorb more of the cost from this enhancement, which in Macquarie’s eyes makes the true enhancement worth closer to $130 per share.

The analysts say that they expect the AXIS shareholder base may have begun to review their support of the merger, in light of the enhanced deal and greater capital distribution, and may be “wondering if an exit via a potential buyer would be the better option at this juncture.”

Macquarie’s analysts say they would not be surprised if EXOR has one more final move up its sleeve to convince PartnerRe shareholders to vote for its deal. This latest enhancement, they say, could be AXIS’ final move in this M&A saga.

This is one of those deals that is now beginning to split analyst opinion.

Keefe, Bruyette & Woods (KBW) analysts led by Meyer Shields called the deal enhancements “incrementally positive for PRE and incrementally negative for AXS shareholders.”

However the KBW analysts still see the deal as compelling and see benefits in the merger.

Also, KBW’s analysts don’t expect any further enhancements to the offer from EXOR, saying; “EXOR CEO John Elkann has repeatedly said that it won’t raise its $137.50 cash offer for PRE, and he indicated that the offered increased return to preferred shareholders is also final, so we don’t expect another counter-offer from EXOR.”

KBW feels that the enhancement from PartnerRe and AXIS may be sufficiently accretive to PartnerRe shareholders to get the all important positive recommendation from ISS and Glass-Lewis.

But the KBW analysts have also begun to question whether the deal is now really “worth it” for AXIS and its shareholders.

The “immediate financial benefits” to AXIS have faded as the amount of capital to be paid out to PartnerRe shareholders has risen, the analysts say. But they believe that the “post-deal strategic rationale remains intact.”

“W e think that the likely reduced reinsurance spend stemming from ACE’s planned buy of Chubb (and any other primary insurer consolidation that emerges in response) only increases the importance of scale and diversification for the combined companies’ P&C reinsurance operations, and also highlights the benefits of a bigger life reinsurance book,” KBW’s analysts explained.

Meanwhile rating agency Standard & Poor’s said that the enhanced merger terms would not affect its ratings for PartnerRe or AXIS Capital.

“Despite the enhanced merger terms, we expect the new consolidated group’s capital adequacy to remain very strong and materially redundant at the ‘AA’ level after the transaction closes and through 2017,” S&P commented.

The rating agency continued; “We expect the consolidated entity to continue to generate strong underwriting performance with a combined ratio of 90%-95% if the respective management teams can integrate the two complex companies and effectively manage and optimize the consolidated exposures. We also expect the merger to achieve at least $200 million in annual run-rate pretax cost savings in the first two years of operations.”

But here’s the important factor, which is no doubt already taking its toll at the merging companies; “However, as this transaction drags, it distracts management teams and employees of both companies, which could accentuate integration and execution risk.”

So as this M&A saga rolls on it is beginning to cause a divergence of opinion as to just how worth it this deal is for all sides now.

Bringing together PartnerRe and AXIS remains compelling for the NewCo a few years down the line once the integration is completed. But for the shareholders a swift exit may seem increasingly attractive.

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

– PartnerRe and AXIS reveal improved merger terms.

– EXOR says PartnerRe & AXIS acknowledge transaction is inferior.

– PartnerRe and AXIS Capital evaluate improving merger deal.

– As EXOR pursues PartnerRe, AXIS could attract buyer: Macquarie.

– Activist Sandell says PartnerRe board misinforming shareholders.

– AXIS needs to match, or beat, EXOR’s improved PartnerRe offer.

– EXOR enhances deal terms for PartnerRe shareholders.

– PartnerRe unimpressed with EXOR’s expanded completion guarantee.

– EXOR sweetens PartnerRe offer with completion guarantee.

– EXOR says receiving positive response from PartnerRe shareholders, plus updates from both sides.

– PartnerRe cites inadequate price, unacceptable risk of EXOR offer.

– Confusion over whether Arch is bidding for AXIS, or not.

– KBW analysts still give AXIS the edge to win PartnerRe deal.

– Arch said to be considering AXIS Capital bid: Reports.

– Analysts feel EXOR has improved chance of buying PartnerRe.

– EXOR capital structure has no bearing on PartnerRe rating: S&P.

– EXOR accuses PartnerRe board of “engineering” AXIS transaction.

– PartnerRe Board urges Preferred Shareholders to vote for AXIS merger.

– Bermuda court rules against Exor’s shareholder detail request.

– PartnerRe shareholders should vote to go with AXIS: KBW analysts.

– 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.