PartnerRe/Exor: cash now, shares later

Take your pick: a hostile cash offer at a slender premium now, or an all-share tie-up with benefits that may not add up to as much. The conundrum for PartnerRe's investors is whether to accept a $6.4bn cash offer from Exor, the investment vehicle of Italy's Agnelli family, or stick with their reinsurer's preferred tie-up with rival Axis Capital.

Though Bermuda-based PartnerRe and Axis tout their amalgamation as a merger of equals, the former is paying up for the privilege. To pick just one metric, it is contributing more than 56 per cent of net income (based on the last full-year results) yet will have less than 52 per cent of the combined group. It is easy enough to explain the sector urge to consolidate: the absence of big insured natural catastrophes makes it hard for reinsurers to raise premiums, and investment returns are faltering. PartnerRe is bearing up, for now.

For its part Exor, with its controlling stake in Fiat Chrysler Automobiles, wants to diversify by buying PartnerRe at $130 a share - a paltry 14 per cent premium to PartnerRe's undisturbed price in a contrarian bet on reinsurance. At least, based on PartnerRe's net asset value growth over the past half decade, Exor could beat its own internal target of 8 per cent annual growth in asset value.

Too bad that PartnerRe has spurned Exor's bid, instead reminding investors of the touted $200m savings from its Axis tie-up, of which just over half of the $1.4bn of taxed and capitalised value - say $2.40 a share - would accrue to its investors. There is no such scope for in-sector savings with Exor. But its offer has prompted an $11.50-a-share special dividend from PartnerRe - if the deal closes. That is taking money out of one pocket and putting it in the other, but investors would probably get it anyway. It is roughly the reinsurer's $550m surplus capital at end-2014, on Morgan Stanley figures.

With the sector's predicament, Exor's cash is tempting. But given that PartnerRe entertained its bid, a richer sale - to either Exor or somebody else - must remain on the table.

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