Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ISS tells PartnerRe shareholders not to vote for AXIS merger, plus EXOR’s response


Institutional Shareholder Services Inc (ISS), an influential proxy advisory firm, has now issued a recommendation on the proposed reinsurance merger of PartnerRe and AXIS Capital and has told shareholders they should vote against it.

EXOR logoUpdate from EXOR at the bottom of this article.

As a result of the ISS opinion, analysts at Macquarie Securities said “It’s over” as they now believe EXOR stands a greatly improved chance of achieving its goal of entering the reinsurance market through the purchase of PartnerRe.

The ISS report goes into detail explaining the process, evaluating the alternatives and looking at the response to EXOR’s bid from PartnerRe’s Board.

ISS explained; “The true economic value of the AXIS merger consideration is at this point unknowable, both because of assumptions about how the business challenges would play out and uncertainties about how much AXIS shares are inflated by investor speculation about events other than the consummation of this merger.”

So ISS feels there is no guarantee of the merger producing superior value for shareholders, as PartnerRe and AXIS have been saying all along.

Conversely, the proxy governance firm explains; “The EXOR offer, by contrast, represents an unassailable and healthy 23.1% premium to PRE’s unaffected price on Jan. 23, and even a 2.5% percent premium to implied “value” of the AXIS merger consideration, even before accounting for any speculation in AXIS shares. It may not be the highest offer the board could negotiate, or could have negotiated, with EXOR. With two weeks remaining before the shareholder vote on this AXIS transaction, however, the certainty and premium which the extant EXOR bid offers makes it the better alternative for PartnerRe shareholders.”

ISS clearly feels that PartnerRe’s shareholders stand to profit much more greatly and immediately from the buyout by EXOR.

As a result, ISS recommends that; “A vote AGAINST the proposed amalgamation with AXIS is warranted in light of the availability of a superior and relatively certain all-cash offer from a competing bidder, and the significant concerns about the sales process which raise doubts as to whether the PartnerRe board was able to negotiate the best possible outcome for its shareholders.”

Macquarie’s analysts, led by Amit Kumar, explain that after the ISS opinion it would now be difficult for AXIS and PartnerRe to salvage the merger, however they continue to recommend investors buy AXIS stock as it now becomes an attractive takeover target itself.

Also Macquarie notes; “If the process is mutually terminated between PRE and AXS, there is an 8% upside to the current target price of PRE factoring in the break fee.”

ISS’ recommendation could also put to bed the tax issue that PartnerRe and AXIS raised, as it clearly feels there is value for shareholders in going with EXOR, which it likely wouldn’t have recommended if there was any particularly onerous tax issue. So perhaps ISS either feels it’s a non-issue or not severe enough to warrant shareholder concern.

So could this be the end of this reinsurance M&A saga? Certainly the market could do with some certainty and the companies involved can proceed with business as usual, once this is all behind them.

The saga shows that intangible benefits, such as the bigger is better, scale will win, and diversity is king approach of the PartnerRe AXIS deal is not, to shareholders, perhaps as important as getting a decent premium for their investments.

For EXOR, the chance to secure this deal is now. The Italian investment holding group has already been told it can negotiate with PartnerRe, after its latest enhanced offer. So with that in mind and the vote looking set to go the wrong way for the merger pair, perhaps this could all be over within days.

Updated with EXOR’s response:

EXOR said that it “welcomes today’s recommendation from Institutional Shareholder Services Inc. (“ISS”), following its detailed review of the transaction, that PartnerRe shareholders vote AGAINST the three proposals related to the AXIS transaction.”

EXOR explained that ISS recommended:

“A vote AGAINST the proposed amalgamation with AXIS is warranted in light of the availability of a superior and relatively certain all-cash offer from a competing bidder.”

Reflecting the intangible nature of the explained value of a merged PartnerRe – AXIS, ISS said:

“Uncertainty over market dynamics, overlaid with the post-merger execution challenges the combined company will face, may well suggest that the competing EXOR cash bid, which gives shareholders both immediately-superior value and greater certainty of value, is a still-more prudent alternative.”

“There is nothing about the performance of either company [PartnerRe and AXIS] to date which suggests that simply combining the two will drive a 30% increase in the [price/tangible book value] multiple the market will assign.”

“AXIS’s stock price appears to have been affected by investors’ anticipation of events other than the consummation of this transaction—particularly the anticipation of receiving approximately $3 per share in termination fees, and the prospect that AXIS itself might be bought at a premium. As a consequence, any direct calculation of the ‘market value’ of the consideration, if it relies on AXIS share prices, is unreliable.”

“The EXOR offer, by contrast, represents an unassailable and healthy 23.1% premium to PRE’s unaffected price on Jan. 23.”

On the potential for regulatory reviews to scupper EXOR’s bid:

“Regulatory reviews appear unlikely to derail EXOR’s bid, given the latter’s ample resources, prior ownership of an insurance business, significant stake in but lack of business overlap with PartnerRe, and the fact that – unlike AXIS – its proposed transaction is unlikely to result in significant shrinkage of PartnerRe employees through merger ‘efficiencies’.”

Finally and perhaps most damning, ISS commented on the behaviour of PartnerRe’s Board:

“Many of PartnerRe’s criticisms of EXOR’s bid, moreover, are at best small beer… For all of its creativity, the board’s criticism of the EXOR offer does not appear substantiated.”

“Still more disturbingly, the fact that it took a competing bidder to get the PartnerRe board to negotiate greater value for its own shareholders raises doubts about the efficacy of the entire negotiation process which led to the merger agreement with AXIS in the first place.”

The ISS report on the deal seems strong enough to certainly sway enough PartnerRe shareholders to vote against the AXIS deal at this time.

Can PartnerRe and AXIS do anything to resurrect their amalgamation chances or is this all over now?

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

PartnerRe & AXIS continue to highlight tax risk of EXOR deal.

AXIS: PartnerRe deal superior “immediately & in future” to EXOR deal, halts integration work.

PartnerRe Board says EXOR’s offer likely superior, but still prefers AXIS.

EXOR adds another $3 per common share to PartnerRe offer

Enhanced PartnerRe – AXIS terms weaken merger rationale: Analyst.

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.

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