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

PartnerRe’s shareholders now hold the keys to the reinsurance firms future, which will either be continuing as a standalone reinsurer owned by EXOR or merging with AXIS Capital, but key shareholders have reiterated that they prefer the all-cash offer from EXOR.

To the shareholders of the reinsurance firm this means cashing out of PartnerRe, so that is a consideration for them, as EXOR would take 100% ownership under its offer, buying all of the shares with its latest, improved offer that was announced yesterday.

EXOR came back with a new offer yesterday, valuing PartnerRe at $6.8 billion or $137.50 per share, a 5.8% increase on its previous all-cash bid. The new offer also removes some of the need for diligence, which could be attractive to shareholders as the process could be completed more quickly.

This followed an enhanced offer from AXIS Capital, which added a special dividend to its original deal to sweeten it for shareholders. However yesterday’s offer from EXOR remains superior in terms of valuation and if shareholders are looking for the highest value they can get, it could be the best deal they will see.

EXOR’s offer yesterday also changed the game a little, as it also announced that it has purchased $572m, or 9.32%, of the total outstanding common shares. That makes EXOR PartnerRe’s largest shareholder now, so it will have a significant influence on how this M&A process eventually plays out.

PartnerRe’s board, which has backed the AXIS deal in the past, acknowledged receipt of EXOR’s latest offer and said it would be considered. The board have always seemed to prefer going down the route of merging with AXIS, rather than remaining as a standalone, pure play reinsurance firm, but with shareholders calling the EXOR deal preferred they may have to respond more favourably now.

Once again, one of PartnerRe’s largest shareholders came out in favour of the new EXOR offer last night. Telling Reuters that the AXIS deal would be “voted down, no question about it” by PartnerRe shareholders, Peter Langerman, CEO of Franklin Mutual Advisers LLC said the new EXOR offer was “clearly superior” to AXIS’ deal.

Franklin Mutual Advisers LLC is a top five shareholder in PartnerRe, so will hold some sway when it comes to voting or deciding on which deal to opt for. With EXOR itself now the largest shareholder in the reinsurer it too holds some sway on how this saga plays out.

With other large shareholders likely also seriously considering, or favouring, the EXOR offer it seems difficult to imagine how the PartnerRe board could continue to push for the AXIS Capital deal, unless it too is enhanced again.

If the board does push for the AXIS bid, without at least bringing the terms and profitability of the deal level for shareholders, the PartnerRe board could very quickly find itself unpopular with shareholders.

Board’s are expected to serve the best interests of shareholders and if PartnerRe’s decide the EXOR bid is preferred then the board may have to bow to their desire to cash out.

Would that necessarily be a bad thing for PartnerRe, to remain as a standalone reinsurance firm? Not at all. If EXOR invest in the firm, seek to grow it and PartnerRe can maintain its recent trajectory, the reinsurer could do perfectly well.

How difficult a position AXIS Capital would be left in if the deal fall’s apart, from its point of view, remains to be seen. It could move quickly to set up another deal, or perhaps lose interest and carry on alone. The merger break up payment it will be due should cover a significant proportion of its costs, but perhaps not all. Morale-wise the whole saga is likely not good for the employees of either firm.

Finally, an interesting note from Macquarie Research, the research arm of Macquarie Capital, highlights the fact that preferred shareholders could actually end up voting on slightly different terms to other types of PartnerRe investors.

There are three preferred equity classes and at least one would be allowed to vote as a separate class, if this process goes down to a vote among shareholders. The two other preferred classes of equity have slightly different terms again.

Macquarie analyst Amit Kumar notes on preferred shares which make up 41.7% of the total equity; “It remains to be seen which direction will they vote or even if they all have equal rights, but this could be an influencing factor if this issue is brought to vote. This isn’t over yet.”

Kumar continues, saying that conversations with PartnerRe shareholders reveals a widespread certainty that EXOR has won the process. But Kumar also notes that Macquarie would be surprised to see AXIS throw in the towel so quickly.

One thing’s certain though. The saga serves well to demonstrate just how attractive reinsurance returns are to investors. EXOR is no ILS investor, but it is a diversified conglomerate, for whom a reinsurer would be a welcome source of diversification and perhaps in the future float (although it denies a desire to leverage the premium float at this time).

The reinsurance market remains an extremely attractive place to operate, with adequate returns still for many kinds of investor.

Will the shareholders, who are investors too of course, like reinsurance and their investments in PartnerRe enough to want to remain holders in it? Or will they choose to cash out on the best terms they may ever see for their shares?