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Cash trumps strategy in PartnerRe deal

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Exor S.p.A.’s $6.9 billion purchase of reinsurer PartnerRe Ltd., driven by the all-cash nature of Exor’s offer and support of proxy advisory firms, leaves open the question of whether PartnerRe made the right choice.

The takeover drama began in January when Axis Capital Holdings Ltd. proposed an $11 billion cash-and-stock merger with PartnerRe.

“The thing that’s been compelling about the Exor offer the whole way along is that it’s cash,” said Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Securities Inc. in Richmond, Virginia.

“It definitely attracted the interest of the shorter-term investors, who saw the opportunity to get some type of a gain and wouldn’t have to continue to hold ongoing stock in an acquirer in order to get that total return,” Mr. Dwelle said.

Also driving the deal were late July recommendations by proxy advisory firms Rockville, Maryland-based Institutional Shareholders Services Inc. and New York-based Glass Lewis & Co. L.L.C. to vote against merging with Axis.

“After the ISS thing came out, then there was a chorus of others who agreed with them,” said Cliff Gallant, a San Francisco-based analyst at Nomura Securities International Inc.

“Once you had the declarations and recommendations from the various proxy firms, that momentum was what really drove the decision,” said Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore.

But some question whether PartnerRe made the best choice.

“We generally viewed the potential merger with Axis as being favorable from a market position and size-and-scale standpoint,” Brian Schneider, senior director of insurance at Fitch Ratings Inc. in Chicago, said. “It would have given Partner a bigger premium base, a bigger capital base and a more diverse portfolio of business, particularly as it would add the insurance business, which would help them from a competitive and volatility standpoint.”

In downgrading PartnerRe’s financial-strength rating to A from A+, A.M. Best Co. Inc. had similar concerns “regarding PartnerRe’s concentration in reinsurance and lack of a diversified product platform, in particular, the ability to provide both primary and reinsurance solutions.”

The merger with Axis “would have begun to address these issues and, with that transaction terminated, these concerns are brought back to the forefront,” Best said in its downgrade statement.

During an earlier investor presentation, Exor Chairman and CEO John Elkann said that “we want to be focused on reinsurance.”

“They strategically completely believe the thesis that you’re a better reinsurer if you are not also a primary insurer,” Mr. Shields said of Exor. “Therefore, you are not alienating any potential cedents by competing with them.”

Exor stated that it intends to make few changes at PartnerRe other than appointing an internal CEO.

“Exor believes the promotion of an internal candidate to CEO is the best avenue for PartnerRe’s future success,” Exor said in its investor presentation. The “incumbent management team will be empowered to operate the business with autonomy.”

“Based on what they told me, they have no plans to change anything other than appointing an internal CEO,” Mr. Shields said.

But Exor also said former PartnerRe CEOs Costas Miranthis and Patrick Thiele are not in the running to head the company, Mr. Shields said.

Observers also noted the unique nature of the deal given the previous connections among Exor and Axis with PartnerRe.

Turin, Italy-based Exor was among original investors when PartnerRe formed in 1993. Albert Benchimol, president and CEO of Pembroke, Bermuda-based Axis, was executive vice president and chief financial officer of Pembroke, Bermuda-based PartnerRe Ltd. from 2000 to Dec. 31, 2010.

“I do think this deal had some fairly unique features to it,” given the prior management relationships, Mr. Dwelle said.

“The level of insight and comfort that Axis, in the person of Albert Benchimol, has about PartnerRe, they don’t have anywhere else,” said Mr. Shields.

Indeed, Axis may be pressed to find another partner like PartnerRe.

“I don’t think there is any other property that’s close to being as obvious a fit with Axis as PartnerRe was or is,” Mr. Shields said.