M&A Announcement

Apr 15, 2015

Slides

Ladies and gentlemen, good afternoon. Welcome and thank you for joining Exor Analysts and Institutional Investors Conference Call on Exor's $6,400,000,000 all cash proposal to acquire Partner Re. Please note a presentation is available for download on the Exor website, www.xor.com, under the Investor Relations, Documents and Presentations, Presentations section, and any forward looking statements Exor Management makes are covered by the Safe Harbor statement included in the presentation material. As a reminder, all participants are in a listen only mode. Later, there will be a brief question and answer session. Please note that this conference is being recorded. At this time, I would like to turn the conference over to our host, Chairman and CEO, Mr. John Elkins. Sir, you may now begin. Thank you. Hello to everyone, to the ones who know us and to the many who don't, and a special welcome to all from PartnerRe who have joined the call. We had a eventful day yesterday and it ended up very well as Juventus, the football team Exor owns from the city of Turin did very well in Champions League by winning 1-zero with Monaco. But this is not what we're going to talk about today. We're going to talk about the proposal, which we announced yesterday, a proposal of yesterday, a proposal of $6,400,000,000 for all cash to acquire PartnerRe. This is a superior proposal to what is today on the table. It represents a 16% premium to the value of Partner Re, dollars 130 per share and it's sold cash. It's fully financed by Exor investment grade credit facilities and it requires no capital increase nor shareholder vote. We view PartnerRe as a great company and it's an attractive investment for Xhor consistent with what we have been telling our shareholders in the recent years. We have demonstrated to be a stable and committed owner of business and this is what we intend to do with Partner REIT, further strengthening its position as the leading global reinsurer, which it already is. We intend to work and retain with key management and the employee base and value very much the partner rebrand. We want this proposal to be friendly and we think it can be expeditiously transacted. Now as many of you don't know us, what I'd like to do is quickly give you an overview of who we are. Exor is one of Europe's leading investment company. We have our net asset value of more than €13,000,000,000 We have more than a century history of entrepreneurial and successful investments. We own global businesses, primarily based in Europe and in the U. S. And we have been actively participating in building these integrate companies. We are committed and intend to continue being committed to a conservative capital structure. Our objective is over the long term to have our NAV grow our net asset value grow over time in exceeding our the benchmark which we refer to, which is the MSCI World Index. Today, the companies we own, the most known and our largest company by value is Fiat Chrysler Automobiles, which is the 7th car manufacturer in the world and also owns the unique car property, which is Ferrari. CNH Industrial is one of the global leaders in the capital goods world and it has a very strong business in the agriculture equipment space. And Cushman and Wakefield is the largest global real estate service firm privately held. We have also other investments, but have been focusing on reducing our smaller investment to concentrate on large global businesses. What have we achieved in terms of returns since XOR was born as the merger between Ephys and Efil in 2009. Our NIV grew at a compounded annual rate of 27.9%, beating by approximately 10 point the MSCI. Our shares did better, nearly 40% of annualized share price growth and this was driven by a tightening of our NAV discount. Holding companies do trade with a discount to NAV And our discount went from nearly 60% to close to 20% today, partly driven by less volatility in financial markets, but also by what we've done in managing our net asset value, simplifying our capital structure and increasing the communication with our shareholder base and the market. Talking about that, when we last had our presentations to investors and analysts, which was in May of last year, when we hold our AGM the 29 May. And we were clear that our intentions were to focus on our current investments and all 3 of our big ones. Our big 3 went out with a plan FCA, CNH Industrial and Cushman and Wakefield of what they intend to do in the near term future. We continued streamlining the portfolio. As I said before, we want to have less smaller investments and more larger ones and we've been during the year reducing our interest in Sequana as an example. We want to focus on new investments and those investments we want them to be large. We want them to be global players and leaders in their industry. We want them to have low required capital expenditures as most of our large companies today are industrial businesses. We want them to have sustainable cash earnings and flows of dividends. And finally, we want to have a very clear governance structure. All of this bearing in mind that we want to have our investment grade rating. As we told you, what we want to do is focus on where we will make a difference. And that's why today, I'd like to talk to you about PartnerRe and why it makes sense for Exor. PartnerRe is a great business. It was founded in 1993. And anecdotally, we were one of the founding partners back in 1993. It has become one of the leader in its industry, the reinsurance industry. The reinsurance industry is basically the insurance for insurers. It has a very global revenue base, 40% of its business is in Europe, approximately the same What does it do? For What does it do? For example, Partnere is very strong in property cat insurance, where it operates on both a quota share and excessive loss. But for example, in specialties, it has a very strong position in agriculture, where the company ensure farmers yields, which are a function of volumes and prices. It is a very strong company and it has a very strong balance sheet. It's big sizable $22,000,000,000 of total assets. It has $17,000,000,000 of cash and investments, which are conservatively invested and it has a conservative financial leverage. We like this a lot. And as owners of this company, we would be committed to maintaining these characteristics. Now why do we want to invest in the reinsurance sector, a sector which is today out of favor, a sector where pricing is and has been bad. On one side, you have more capital coming in from the alternative space, which has increased. In a low interest environment, the profitability of this industry also weakens. But we think that if you look at this with our perspective, which is a long term perspective, and if you're able to continue running a business with strong underwriting skills and discipline, you will be able over the cycle to do well. And this is a business when it does well, that it's highly cash generative and it distributes a lot of this capital to shareholders. Just as an example, in 2014, which was a good year, because it lacked catastrophes, the reinsurance overall returned 3 quarters of their operating earnings to shareholders. If we think about us, this provides a great complement to the businesses we already own, which are concentrated in industrial sectors in the automotive and capital goods businesses. We believe that there is a know how that we can jointly use in the investment skills we have in XOR and the ones that exist in Partner Re. But mostly, we think that being long term oriented provides a great advantage for Partner Re, Especially thinking of it as a private business, it will allow it to have flexibility and the right discipline across market cycles and the financial resources to grow opportunistically when needed. We have had experience in this sector. We have studied this sector in a lot of detail in the last 3 years. And as I mentioned before, we were one of the founders of PartnerRe back in 1993. But that's not why we like PartnerRe. We like PartnerRe because since it developed into a very good business, a good business for its clients, a good business for the industry. We think that the management team and the employee base is very strong and has a very strong culture in underwriting. It has a global footprint and a broad underwriting diversification, which we like. But mostly, it is one of the few and rare pure reinsurers that exist in the world of this scale. And we don't like to be in businesses where we compete with our customers. The strength of PartnerRe from a financial standpoint is clear and this will not be changed on the contrary under our ownership. And finally, it's been a great business in terms of performance. If you look at the last 5 years, it's delivered around 10% growth on the adjusted book value per share and 9.5% of ROI. And this is why we decided to go ahead with the following transaction. Our proposal is to buy 100% of all common shares of PartnerRe for cash. We intend to offer every shareholder of PartnerRe US130 dollars which equals to $6,400,000,000 in aggregate, which is a premium of 16% on the current all share offer from AXIS. We provide financing certainty and we want to keep the model as it is. We like the model. We like how partner operates. We like what the senior management and its employee base have done and we like the brand. Now why is our offer superior? Shareholders of Partner Re would be getting US130 dollars all cash, which is at a significant premium respect to what today they're being offered. And this is all cash and it provides absolute certainty with an uncertain offer, which depends on synergies, on how those could be realized on disruption within the business with key employees, with employees, customers, in addition to market risk. We believe that our offer provides full and immediate value to all PartnerRe's shareholder. But not only, we think it's a great opportunity for the management team and the employee base to continue what they're doing. We think our offer is much more simple in terms of execution, doesn't have any disruption, doesn't create confusion. We want to leverage the strength on what PartnerRe is by maintaining its identity. It has been in the industry for more than 20 years with a lot of successes. We are and have proven to be a strong and committed owner. And we are interested in the long term prospects of PartnerRe. So what have we done? Yesterday, we had our Board, the Exor Board, which approved unanimously for us to go forward with this proposal. We have fully committed financing And we opened the discussions. I was able to speak to the Chairman of Partner Re and explain to him our proposal in a friendly way. That followed by a written proposal, which we submitted, our letter, which contain our superior proposal and a draft amalgamation agreement which substantially is the same as the one of Axis and Partnere. Obviously, it includes the fact that our offer is 100% cash. We're hopeful that we can continue forward with a due diligence. It will be a limited confirmatory due diligence, which we'd like to complete promptly. We don't anticipate any difficulty on the normal regulatory review, which we'd like to go forward. And we're very hopeful to be able to close by the end of this year. Now before I take your questions, I'd like to conclude with a couple of remarks. First of all, partner e is what we were looking for. And as you recall, when we last spoke about this in 2014, we wanted a third of XOR's gross asset value. We wanted a company who was a global player and an industry leader and this is exactly what Partner Re is. Low required capital expenditures and Partner Re's business requires little capital expenditures to grow, sustainable cash earnings and flow of dividends. Now this is not a riskless business business and 2014 was a good year with no catastrophe. And in that year, Partner Re was able to distribute to its shareholders €700,000,000 of capital. And finally, well defined governance rights. And as this is envisaged as giving us full ownership of the company, this clarifies governance. So it is my belief that PartnerRe is an excellent fit for Exor. Now just to summarize, I'd like to leave you the fact that our offer is by far a superior proposal to the AXIS Oshare transaction. Our proposal provides a significant premium. It's all cash and it has certainty for Partner Re shareholders. I also am convinced that this is a unique opportunity to preserve what PartnerRe is and has done, its unique underwriting culture and the brand that it represents, which we are sure that under our ownership will strengthen even further. This is a great opportunity for who works at PartnerRe. We have ample financial resources. We have a committed financing. So we can complete this transaction. Exor and Partner Re have solid financial positions and those will be maintained as our strong credit ratings after completion. This is a good investment for us and we look forward engaging conclude saying that we are fully committed to completing this transaction on the proposed terms. I thank you all very much for your attention and I'm happy to take questions. I'd really would like to keep the questions pertinent to what we just discussed to this proposal of $6,500,000,000 to acquire PartnerReap. Thank you. Thank you, sir. Questions. The first is on the reinsurance sector. Could you please outline your view on the expected scenario as for the reinsurance premiums in this sector? And do you feel there could be some price pressures ahead? And what kind of trends do you see in claims and related costs? This is the first question. The second one is regarding the consolidation trend in the reinsurance business. Before your offer, Partner Re was expected to merge with another company. Do I understand that you will remain as a long term shareholders, but I'm wondering if in the going forward that partner might be involved in the aggregation and consolidation process in the sector? Thank you very much. Yes. Monica? Yes. Monica, this is Fabiola here. We are not we were not able to hear you. So could you please just repeat your last question please? The last question just last. Hello? Yes. Could you please repeat your question, because we can't hear you very well. Okay. Can you hear me now? Far from the microphone please. I'm on the handset, so I'll try. The first question is on the if you can give us some flavor on the expected scenario as for the reinsurance premiums? And if do you feel there could be any price pressure ahead in the sector? And what kind of trends do you see in claims and the related costs? The second question, I hope you are hearing me better, is on potential aggregation in the reinsurance sector. Before your offer, Partner Re was expected to merge with another company. I understand that Xol will remain as a long term shareholder, but I was wondering if going forward Partner Re might be involved in the consolidation trend of the segment in any case? Thank you very much. Thank you, Monica. So as I mentioned before, the industry is challenged and the pricing environment is declined because of more capital within this industry. And a lot of it is also coming from what's defined as the alternative sources of capital. On the other hand, we do have a low interest environment, which is also compressing profitability. Now as we take a long term view, we do expect that over cycles, we'll be able to have returns that will be above our objective, which is to beat the MSCI World Index in euro, which has returned historically 8%. We think that the size of the company of Partner E is sufficiently strong in terms of balance sheet to maintain and grow from here to be one of the leading global reinsurers. The proposed merger today is not a merger within the reinsurance sector, but adds an insurance component to a reinsurance business. And as I said before, we like and value the purity of the business just operating in 1 sector. And the fact of competing with your own clients is not something that we're comfortable with. Okay. Very clear. Thank you very much. We can now take our next question. It comes from Martino De Ambroggi. Your line is open. Please go ahead. Yes. Thank you. Good morning and good afternoon everybody. A question on the loan to value at Exor level. Following partner reacquisition and even including the expected divestiture of Cushman and Wayfould, okay, depends on what will be the cash out, but the loan to value of Exor will be in excess of 0.2, which was the usual stated threshold. So I'm wondering if this is a level that you are comfortable with going forward? Or additional divestitures can be taken into account in order to return below this level quite quickly or maybe in the long term? Thank you for your question, Martino. And you know well that this is a priority for us. So we've had good and constructive conversations with the rating agencies. And we expect this transaction to keep ForExor our investment grade rating. And we have plans that we will develop over the future years for us to continue and maintain a very strong financial and capital structure? If I may still on this issue. So the answer is that we are comfortable with loan to value in excess of 0.2 if not a problem and we are not thinking about other moves inside the portfolio. As I mentioned to you, we had good conversations and we are going to do the necessary moves in the future to come for us to continue maintaining a strong capital structure. And we are committed to our investment grade rating. Okay. Thank you. One more question on always on this issue. It's a big ticket, so 6 $1,000,000,000 Can we say that the diversification process will be in a standby for a while going forward? We can't say that absolutely. And we haven't been doing a sizable investment since a long time. And as you all know, this is something that we've discussed. So we were waiting for the right opportunity and we wanted it to be sizable. This is sizable and if and when this goes forward, we'll have a lot to do with our existing companies. Okay. Thank you. Thank you. We can now take our next question. It comes from Philippe Houchois of UBS. Your line is open. Please go ahead. Yes. Hello. This is Philippe Houcher of UBS. My question is following on the LTV and leverage. Is the leverage temporary or not that Exo will have following the acquisition? If that has implications on the business on running the business of Part 3 in terms of leverage since it will be a fully consolidated entity within XOR? Is there an issue there or is it not the case, please? No. As I mentioned, we like the fact that PartnerRez is a very strong company with a strong balance sheet and we won't touch that. On the contrary, we want that to be maintained and to be strengthened in the future. Thank you very much. Thank you. We can now take our next question. It comes from Charles Sybowski of BMO Capital Markets. Your line is open. Please go ahead. Yes. Thank you. First question in terms of the offer that you've made to the Board of Partner Re, is this a first negotiating stance? Obviously, the $130 a share is over the current AXIS deal price. But were AXIS to come back with a counter bid, are you open to negotiation? Or is this a best and final? So I'll answer to this question Charles and thank you for it. It's a very valid question. So our proposal is very clear and we see full value in our proposal. I cannot comment on what Axis will want to do. But as you might know, we are disciplined and we'll stay disciplined when it's about prices. Okay. Regarding how Partner Re Management and keeping management in place, as you know, Costas has stepped aside at Partner Re. What would be your plans for senior leadership at Partner going forward? Another great question, Charles. We know and believe PartnerRe has a very strong bench of management. As you know, unfortunately, we have not been able to interview anyone from the management team because of the restrictions on the partner REIT agreement with AXIS. So once permitted for us to do so, we plan to interview the internal management and we believe that we will be able to find a CEO candidate. Okay. And finally, one of the arguments or one of the cases Partner Re made in terms of its deal with Axis was creating the 5th largest reinsurance company globally as Axis's reinsurance. And the case was that scale was going to be required in the reinsurance business going forward. And your comments earlier seem to believe that the current scale of partner makes sense and is adequate. Is there potential issue there with what partner management has said about their expectation of scale going forward and how you see the industry? Yes. Absolutely not a constraint. And if you look at the access reinsurance business, it is marginal compared to the other businesses in the primary insurance. And if you look at the largest pure reinsurer globally, which is Hanover Re, they've demonstrated by organic growth to achieve significant market dominance. All right. Well, thank you very much for your answers. Thank you, Charles. Thank you, sir. We can now take our next question. It comes from George Nicola of Ursel. Your line is open. Please go ahead. Yes. Hello. Congratulations with the proposal transaction and Juventus winning last night's game. I was wondering if you can share with us a little bit more the background that led you to this proposal considering the context that the AXIS Capital merger was on the table. I mean, could you share with us if you were involved in the process at the time that the AXIS Capital negotiations were going on? Thank you. We've been a student of the industry, both insurance and reinsurance for the last 3 years. We have not been interacting specifically with none of the 2 companies involved. But when this transaction appeared, meaning that there was an interest in doing something, we started studying it very carefully, which is the reason why we came to the conviction of putting our proposal to the Board of Partnery yesterday. Thank you. Thank you, sir. We can now take our next question. It comes from Amit Kumar of Macquarie. Your line is open. Please go ahead. Thanks. It's Amit Kumar from Macquarie Capital. John, in your opening comments, you stressed on the word friendly a few times. I was wondering hypothetically, is there a plan B in case the Board of Directors of Partner rejects the offer? Are you open to going hostile? Amit, this is a friendly proposal. And I'm very confident and I see no reasons why the Board of Partnering wouldn't make the right decision for the company, for its employees and for its shareholders. But let's say hypothetically, if they do reject it, and we've seen that happen previously, Are you still going to pursue or are you going to move on? As I mentioned, I'm very hopeful that they will come to the right conclusion. Okay, fair enough. The other question, John, you mentioned that you talked about the investment strategy. I was wondering, is there a plan to maybe move towards, let's say, higher risk assets? And if that is the case, have you had any discussions with the ratings agencies on this? No intentions to do so, I mean, we think that you can make good money without taking risk assets. Got it. That's all I have. What's that? Risky assets. Okay, fair enough. That's all I have. Thanks for the answers. Thank you. We can now take our next question. It comes from Alberto Villas of Intermonte. Your line is open. Please go ahead. Hi. Good morning, good afternoon to everyone. Just a couple of questions. The first one is if you can explain to us why you're looking for 100% consolidation of this investment rather than launching a tender offer and keep the company listed eventually with a majority stake as you have in the rest of your investments right now. So if there is a strong rationale because you want to merge with Partneri compared to having a majority shareholding of the asset. And second one is back on the financing. If you can give us an idea what are your expectations in terms of the cost of the funding for this transaction and the structure of the the financial structure of the group after questions. As I mentioned, this is a business which being private has lots of benefits, because it is a cyclical business. And so being able to manage those cycles without being a public company has big advantages. So we value very much this offer also because it will enable the business to be private. And as you well know, we own also private companies and Cushman and Wakefield would be an example of that. Now for the financing, I think the best proxy for that is for you to look at the interest we pay on our 10 year bond, which you know is around a little more than 2%. Thank you all for your questions. I'm now going to I'm going to address some of the questions which we have received via email. So one of the questions we have from that we received is if we want to acquire a primary insurance operation as a complement to Partnerie. As I said, we like the purity of the business and we think there's a lot of value of being a pure reinsurer. So we would not be looking at primary insurance operation as additional as an additional business to complement Partner Re. And the other questions we've received are effectively have already been answered. So I'd like to thank you all very much. And we are very we're very grateful for the opportunity to have been able to speak to all of you. And we look forward buying all the shares of Partner Reef for US130 dollars Thank you very much. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.