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

Analysts in the insurance and reinsurance space gave EXOR’s improved offer for the shares of reinsurance firm PartnerRe the thumbs up, with some going so far as to suggest that AXIS Capital needs to at least match it, if its merger deal is to survive.

The latest twist in this insurance and reinsurance M&A saga saw EXOR make an enhanced and increased offer for PartnerRe’s common and preferred shares yesterday. The new offer has seemingly been well received, according to reports, putting the ball firmly back into AXIS’ court to enhance the merger deal terms in order to keep up.

Analysts at Keefe, Bruyette & Woods, led by Meyer Shields, said that they view the improved EXOR offer for PartnerRe as a “significant enhancement” to the previous terms that were on the table.

In particular, Shield and the KBW analysts view the enhancements to terms for preferred shareholders of PartnerRe as key to the potential success of EXOR’s bid.

KBW explained; “EXOR enhanced its PRE offer, most significantly (in our view) pledging to exchange current preferred stock for new preferreds paying 100 bps more (~$8.5 million per year) and extending the call protection for these new issues until 2021.”

“We think the higher coupon and extended life (especially in the current low-yield investment climate) could sway the vote in EXOR’s favor,” KBW’s analysts continued.

The preferred shareholders represent over 40% of the PartnerRe shareholder vote, which is why KBW views the terms offered to them as so important to the deal.

“We view this is as a significant enhancement to EXOR’s offer,” the analysts commented, adding that the latest EXOR offer is “one that AXIS probably needs to match or top to stay competitive.”

However, KBW’s analysts do think that AXIS Capital has room in its amalgamation offer to match this enhanced EXOR deal, which suggests that this could rumble on.

KBW’s analysts explained; “We believe that AXS needs to match or beat EXOR’s higher preferred dividend, but we also think that $8.5 million (or $0.04 per pro-forma share) per year isn’t an insurmountable hurdle.

“Compared to expected annual net income of $1,153 million, we also don’t think higher preferred coupons would overly burden its post-amalgamation capital plans.”

At the shareholder and analyst meeting EXOR held in New York yesterday the investment holding firm explained that its offer for PartnerRe is superior to previous comparable deals in the reinsurance industry, as well as to AXIS’ offer.

The enhanced offer from EXOR has likely gone a long way towards persuading PartnerRe’s shareholders that this is true, leaving little option for AXIS and PartnerRe’s board other than to enhance the terms of the proposed amalgamation.

Analysts at BMO Capital Markets agreed, in a note to clients, saying that the enhancements in EXOR’s offer “strengthen the company’s probability of success in getting PartnerRe shareholders to vote against the merger with Axis.”

According to reports, John Elkann, chairman of EXOR S.p.A., said at the investor meeting yesterday that if successful in the bid for PartnerRe he intends to find a new CEO for the reinsurance firm from within the organisation. He also explained that there is no current plan to reduce PartnerRe’s headcount after the acquisition.

EXOR sees PartnerRe as a first step into financial services, providing the investment company with diversification, and Elkann said that if successful in the bid for the reinsurance firm further acquisitions could be made to grow its footprint in the space, if the right deals came along.

Meanwhile, PartnerRe said yesterday that its shareholders deserved “substantive and factual answers” from EXOR on a number of topics, including on execution risks, a negative impact on preferred shares and PartnerRe’s rating and why EXOR did not engage the PartnerRe board.

EXOR does claim to have made numerous attempts to engage with the board of PartnerRe and also the reinsurers senior management, but says it has so far been allowed to.

Finally, Elkann also disputed the discussion around the involvement of ex-PartnerRe CEO Patrick Thiele, saying that PartnerRe’s board has been “shameless” in its treatment of him. Thiele told the PartnerRe board that he believes the AXIS deal offers “virtually no strategic benefit,” but has since been speaking with EXOR it had been reported. Hence his allegiances had been questioned in the press.

So right now it seems that the AXIS-PartnerRe deal should be considered on the back foot, with a need to enhance the deal for PartnerRe’s shareholders benefit if that amalgamation is to go ahead.

Given how long this process has been rumbling on, it is hard to see anyone walking away at this point in time, although not impossible. So we may well see some further enhancement to deal terms coming from those camps as they continue to try to fend off EXOR.

It will also be interesting to see how PartnerRe’s board responds to the clearly enhanced EXOR offer, especially now the board has come under increased scrutiny from some external parties who have questioned its approach to governance over this deal process.

It should also be noted that one the main tools to enhance the deal on the AXIS side seems to be returning capital and special dividends. With EXOR having a much more prudent capital return plan, aiming to invest back into the PartnerRe business, the preferred shareholders may see more long-term value in not distributing more in the way of special dividends. So even a sweetened AXIS deal may not be as sweet as it thinks unless it clearly and resoundingly offers greater value than EXOR’s.

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

– 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.