PartnerRe & AXIS continue to highlight tax risk of EXOR deal

Reinsurance firm PartnerRe and re/insurer AXIS Capital continued to reaffirm their commitment to merge yesterday, highlighting what they deem a tax risk for preferred and common shareholders if they opted for the PartnerRe buyout offer from EXOR.

Just the day before PartnerRe had admitted that the all-cash offer from Italian investment group EXOR S.p.A., seeking to enter the reinsurance market by buying the firm, “would reasonably be likely to result in a “Superior Proposal”” compared to the planned merger with AXIS Capital. This came after EXOR upped its offer with a $3 special dividend to $140.50 per share.

AXIS then came out to say that, while it remained in favour of the merger with reinsurance firm PartnerRe saying that it was a superior deal “immediately and in the future”, it was halting all integration work for the moment.

Despite what seemed to be a change of tone, perhaps the first signs of resignation that EXOR was likely to keep pushing its entry into reinsurance harder than the pair could push their merger, it seems the Boards of PartnerRe and AXIS have one more weapon in their M&A arsenal.

The pair said that the merger is superior to the EXOR deal for shareholders and comes with less risk and that they reaffirm their commitment to merge “provided that the Companies receive a private letter ruling from the IRS that the change in terms would not create a “listed transaction.””

This listed transaction issue is the one which could create a tax burden for shareholders, according to the pair. They claim that EXOR’s offer to preferred shareholders could subject “preferred shareholders (and possibly common shareholders) to an onerous annual reporting and penalty regime applicable to prohibited tax shelter transactions under U.S. income tax laws.”

So the pair say that an IRS ruling is desired, in order to provide greater certainty. “EXOR’s proposal for preferred shareholders appears to disregard this fundamental responsibility and is therefore unacceptable to PartnerRe’s board,” the announcement late yesterday explained.

EXOR said recently, in response to this tax accusation, that it “does not believe that the Internal Revenue Service (“IRS”) will treat the preferred shares in the EXOR proposed exchange offer as part of a “listed transaction” or “prohibited tax shelter” involving “fast-pay stock”.”

However EXOR had said that it was prepared to obtain the IRS letter if necessary, explaining that it was “willing to seek a private letter ruling from the IRS that the preferred shares issued in the exchange do not constitute “fast-pay stock” or are not otherwise part of a listed transaction. While PartnerRe and AXIS have specifically linked the timing and delivery of their exchange offer to such a letter, there is no guarantee that the IRS will issue a private letter ruling on a timely basis, or at all.”

EXOR even went as far as to offer compensation if an IRS letter was not obtained by the time it’s transaction closed, saying “a lump sum cash payment equal to approximately $42.7 million, which is the entire amount of 100 basis points of additional dividend payments for five years, would be separately paid by EXOR to the record holders of preferred shares at closing. This compensates holders for the loss of the assured years of coupon increase that they would have had if they participated in the exchange.”

In the announcement late yesterday PartnerRe and AXIS said that they “believe it is more appropriate and provides greater certainty to shareholders to implement these terms only with an IRS ruling in hand.”

PartnerRe Chairman Jean-Paul Montupet said; “Throughout this process, our goal has been to achieve the best value for holders of both our common and preferred shares. We are pleased that we have agreed with AXIS Capital to provide our Preferred Shareholders with a superior proposal and less risk than the proposal put forth by EXOR. We must do what is in the best interest of our shareholders and not expose them to risks that may have serious tax and reporting consequences.”

AXIS Capital CEO Albert A. Benchimol added; “The strategic and financial benefits of the merger agreement between AXIS Capital and PartnerRe continue to represent the most compelling path forward for both companies. We are confident that we will be able to provide superior value both to our shareholders and to our clients and distribution partners through the merger, and we are committed to doing so in a manner consistent with our fiduciary responsibilities. I look forward to continuing that process with our colleagues at PartnerRe.”

PartnerRe and AXIS went on to say that if they are successful in getting this ruling letter from the IRS then PartnerRe’s preferred shareholders would “receive newly issued preferred shares reflecting a 100 basis point increase in the current dividend rate and, subject to certain exceptions, an extended redemption date of the later of (a) the fifth anniversary of the date of issuance and (b) January 1, 2021. The terms of the newly issued preferred shares would be otherwise identical in all material respects to the applicable existing PartnerRe preferred shares.”

The tax issue is a complex one, however EXOR seems confident that its advisers do not believe that its transaction would result in any issues for preferred shareholders. It also noted previously that PartnerRe’s board had been seeking to “avoid a truly committed exchange offer in the Axis-PartnerRe transaction” by its statements to shareholders about the tax issue.

EXOR had previously explained:

The transaction is being undertaken for a business purpose wholly unrelated to the U.S. tax abuse at which the fast-pay rules were aimed and there is no tax avoidance purpose on the part of the issuer of the preferred or the potentially benefited common shareholder, both of which are not U.S. persons in the case of the exchange offer proposed by EXOR.

While EXOR takes at face value the risk PartnerRe and AXIS have identified in relation to their proposal (perhaps as a result of the significant U.S. common shareholder base that will survive that transaction), EXOR rejects the suggestion that the same risk applies to the EXOR Binding Offer.

Which suggests that its advisers feel that the tax risk is greater for the PartnerRe and AXIS deal, perhaps why the issue was raised in the first place.

We’d expect more announcements on this topic in the coming days, as EXOR will likely reiterate its view of the tax issue and no doubt commit to trying to obtain a letter, although it did note previously that the “IRS may see that there is no abuse intended in the transaction and decline to spend administrative time and resources on the subject.”

No doubt this won’t be the last we hear from this M&A battle.

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

– 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.