EXOR: PartnerRe preferreds issued in exchange not ‘fast-pay stock’; offers lump sum payment

By Susanna Moon

Chicago, July 20 – EXOR SpA said it sees no “fast-pay stock” issue under its planned exchange offer for PartnerRe Ltd. preferred shares related to its buyout proposal.

EXOR said it rejects the idea of the “fast-pay stock” tax treatment by the Internal Revenue Service because the transaction will be “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.”

“Despite PartnerRe’s statements to the contrary, EXOR does not believe that the Internal Revenue Service 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,’” according to a press release by EXOR.

As previously reported, EXOR said on July 7 that it had improved the terms of its offer to acquire PartnerRe, including a commitment to exchange PartnerRe’s preferred shares for new preferreds with better terms.

On July 9, Sandell Asset Management Corp. joined in the fray by declaring that PartnerRe was limiting the voting rights of its preferred shareholders by refusing to provide the preferred holder list and was doing so to protect the AXIS deal.

“This conduct is particularly outrageous in light of EXOR’s improved and superior offer, which includes, among other things, a 100-basis-point increase in dividends for PartnerRe preferred shareholders, call protection until 2021 and five years of capital distribution limits,” Sandell said in a public letter.

More on tax treatment

EXOR said it “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.”

EXOR said it also has the backing of its U.S. legal counsel, Paul, Weiss, Rifkind, Wharton & Garrison LLP and would be willing to seek a private letter ruling from the IRS confirming that the preferred shares issued in the exchange would not constitute “fast-pay stock.”

In fact, the company said it has amended the merger agreement to provide that, if the private letter ruling is not obtained by the closing of the EXOR transaction, then it would pay a lump sum cash amount of about $42.7 million, or the amount equal to the 100 bps of additional dividends for five years, to the record holders of the preferreds at closing.

This is intended to compensate holders for the loss of the bump in the coupon that they would have had if they participated in the exchange, the company noted.

In addition, if the private letter ruling fails to come by EXOR closing, EXOR will continue with the planned exchange offer minus the dividend increase, which will be replaced by the upfront lump sum payment.

This allows preferred holders to continue to benefit from both five years of call protection and the more conservative capital distribution policy, the company contended.

For more information on the EXOR offer, contact Okapi Partners LLC at info@okapipartners.com, 877 796-5274 or 212 297-0720 or go to exor-partnerre.com.

PartnerRe, AXIS fattened deal

PartnerRe said on July 16 that it plans to offer to exchange its preferred shares for newly issued preferreds with higher dividends if its merger goes through with AXIS Capital Holdings Ltd.

Under the amended terms, the newly issued preferreds in the exchange offer will reflect a 100-bps bump in the current dividend rate and an extended redemption date of the later of Jan. 21, 2021 and the fifth anniversary of the issue date.

The terms of the newly issued preferreds otherwise will be the same as the existing PartnerRe preferreds.

The exchange offer is subject to a private letter ruling from the IRS.

The amended terms permit PartnerRe to pay an extraordinary cash dividend of $17.50 for each common share of PartnerRe that, immediately prior to the completion of the merger, is either issued and outstanding or underlies share-based equity awards granted by PartnerRe to some of its directors and employees.

The extraordinary cash dividend will be paid at or immediately following the merger, with the payment conditioned upon completion of the merger.

PartnerRe will be permitted to incur debt of up to $300 million in order to pay the special dividend, provided that AXIS is first offered the opportunity to fund all or any part of the debt on mutually agreed terms prior to PartnerRe seeking any debt financing from third parties.

The amendment also removes the condition that PartnerRe’s obligation to close the merger is conditioned on the absence of a three-notch rating downgrade from A.M. Best for AXIS’ insurance subsidiaries domiciled in Bermuda and the reciprocal condition for AXIS as it applies to the A.M. Best ratings of PartnerRe’s insurance subsidiaries domiciled in Bermuda.

EXOR’s improved offer

As previously reported, EXOR said on July 7 that it had improved the terms of its offer to acquire PartnerRe, including a commitment to exchange PartnerRe’s preferred shares for new preferreds with better terms.

EXOR said it had legally committed to offer to exchange PartnerRe’s existing series D, series E and series F preferreds for new preferreds with identical terms to the existing securities but with the following improvements:

• A 100-bps increase in the dividend rate;

• Call protection until 2021. The PartnerRe preferreds become callable in the next three years, and the series D preferreds are already callable, EXOR noted. The company is committing not to redeem the preferreds before Jan. 1, 2021;

• EXOR will commit to limiting distributions to PartnerRe’s common shares to no more than 67% of earnings until Dec. 31, 2020, creating what EXOR called a stronger and better capitalized company. It noted that last year PartnerRe distributed 90% of earnings to shareholders.

“Under the enhanced EXOR binding offer announced today the terms will further provide PartnerRe preferred shareholders with higher return securities, non-callable for longer and in a company legally committed for five years to one of the most conservative capital distribution policies in the insurance and reinsurance industry,” EXOR said in a news release announcing the improved offer.

“This is in contrast to the AXIS/PartnerRe transaction which will adopt one of the most aggressive capital distribution policies in the industry.”

EXOR is offering $137.50 per share in cash for PartnerRe.

In its improved offer, EXOR said it will allow PartnerRe to solicit bids from third parties after signing with EXOR. In this period the termination fee will be reduced to $135 million.

EXOR also said that if PartnerRe is not required to pay the $315 million termination fee to Axis it will pass the full $6.39 per share value to PartnerRe shareholders.

EXOR chairman and chief executive officer John Elkann also gave a personal commitment to provide all information necessary to secure regulatory approvals.

PartnerRe’s response

In its own announcement, PartnerRe said EXOR is putting an “inadequate value” on PartnerRe’s shares.

It also said EXOR’s bid has execution risks and would have a “negative impact” on PartnerRe’s credit ratings and its preferred shares.

PartnerRe is encouraging shareholders to vote in favor of the merger with AXIS Capital Holdings Ltd.

EXOR is a Turin, Italy-based investment company controlled by the Agnelli family and listed on the Milan Stock Exchange. PartnerRe is a Pembroke, Bermuda-based reinsurance company.

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