Expect AXIS to increase its bid for PartnerRe: KBW analysts

Analysts at Keefe, Bruyette & Woods said that they expect AXIS Capital to increase its bid for PartnerRe, after yesterday’s surprise news that Italian investment holdings company EXOR had tabled a $130 per share offer, a 16% premium on the valuation of PartnerRe from the AXIS deal.

KBW’s analysts expect AXIS Capital will increase its bid through the offering of a special dividend payable to PartnerRe shareholders when the merger closes.

The analysts believe that the AXIS Capital – PartnerRe deal, which was already well underway before EXOR’s bid came in, provides value to shareholders strategically, by enabling both reinsurance firms to scale up.

“When the AXS-PRE deal was first announced, we estimated that the merger of equals would boost AXS’s 4Q14 book value per share by about $3.71; the combined companies’ ~$11.4 billion of equity and 209.3 million shares implied a pro forma book value per share of $54.34, versus AXS’ stated diluted 4Q14 book value of $50.63. Similarly, we estimated tangible book value accretion of about $1.48, to $51.24,” the analysts wrote last night.

KBW’s analysts believe that AXIS can accept less book value accretion through paying PartnerRe’s shareholders a special dividend, “without abandoning the deal’s strategic rationale.”

“Even ignoring likely solid 1Q15 earnings (stemming from the absence of major catastrophes, both companies’ anticipated reserve releases, and the shrinking impact of AXS’ s underperforming U.S. D&O book), we think AXS can comfortably offer PRE shareholders a $10/share special dividend. In our view, that would get its offer close enough (2.18 x AXS’s current $52.90 + $10 = $125.32) to Exor’s bid to credibly defend the AXS merger on the basis of synergies, the bigger overall reinsurance book, and the sizable primary insurance book,” they wrote.

Essentially the KBW analysts believe that the original deal, bringing AXIS Capital and PartnerRe together, had attractive enough terms to allow AXIS to make an increased offer. So that would suggest that AXIS may come in with some sort of improved terms, in order to encourage PartnerRe shareholders to stick with their deal and to ignore the EXOR bid.

But here’s the important thing. We do not know what EXOR’s rationale is here, or why they make the bid.

Does EXOR want to keep PartnerRe independent, perhaps plough money in and acquire and swallow a few smaller players to gain scale and relevance? Or would EXOR seek to buy AXIS or another larger player after closing the PartnerRe deal? Or maybe EXOR plans to navigate the challenging market environment, using PartnerRe as a diversifier and source of float for its broader investment holdings business?

EXOR is known to have shown interest in reinsurance before, from an asset management point of view, according to sources Artemis has spoken with. The investment holding firm has looked at the investment-oriented reinsurer business model before as well.

As a large investment group looking to diversify itself away from industrials and the automotive industry, EXOR may be able to value owning a reinsurer a little differently, as a diversifier. That may make the space particularly attractive to it right now and also signal that it may seek to grow that stake, either by investing back into PartnerRe or acquiring others over time.

For PartnerRe shareholders that may actually be an attractive idea. Being owned by a group who seek to grow the reinsurance business, in an almost Warren Buffett way, while also being able to operate at a lower capital cost due to the diversification it offers their overall investment holdings portfolio.

Or perhaps EXOR will buy PartnerRe, acquire some more firms, build a bigger reinsurance business and then sell it? Again that could be attractive to shareholders.

Not every analyst group has the same opinion as KBW, with some suggesting EXOR’s bid may be high enough to make AXIS walk away, while still more suggest that this could stimulate even more bids, perhaps from additional parties.

At the moment nobody knows the real motivations of the EXOR group, nor their plans to take PartnerRe forwards. However there has to be a strong rationale behind it and that might make the bid compelling, even compared to an increase bid from AXIS. The diversification story and ambition to become an investment group with insurance and reinsurance holdings, similar to Berkshire Hathaway, Fosun or Fairfax, is supposedly strong at EXOR. Time will tell.

Also read:

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