March 23, 2020

Breakingviews: Covea should be haggling hard with the Agnellis

by Breakingviews.

What’s French for dumb money? Covea may want to note it down given the Paris-based insurer’s proposed $9 billion purchase of reinsurer PartnerRe, owned by the Agnelli family’s Exor. Crashing peer valuations and a run on cash should give boss Thierry Derez ample room to negotiate a better deal.

Exor boss John Elkann got a nice price from his French counterpart before virus panic set in. At $9 billion – plus a $50 million dividend – Covea was paying 38% above PartnerRe’s book value. That’s a pretty chunky premium at the best of times: Axa was criticised for overpaying when it shelled out $15.3 billion for XL Group in 2018 at a similar valuation. That was before people were being arrested for clandestine grocery shopping in Paris.

That the mood music has changed can’t be lost on Derez. While Covea has yet to detail its exposure to Covid-19, before the outbreak the company’s 18 billion euro war chest was set to grow. Now there’s a danger that Covea’s small business customers will see sales evaporate as economic activity slows. Without revenue they may forgo renewing policies. That would limit the amount of excess capital Covea could generate and make it harder to justify splashing out on purchases.

Covea looks to have some wiggle room. Although the memorandum is binding under French law, it must be ratified by a workers’ council. Others’ worsening woe plays to Covea’s advantage. Firstly, rivals Munich Re, Hannover Re and Swiss Re have seen their share prices crash by as much as half since Exor announced Covea’s approach on Feb. 9. Secondly, Derez is paying cash in a buyer’s market, so he should be able to demand a discount. Lastly, investors can see Exor’s other investments are taking a hit. Exor’s shares are down 46% year to date, led by automaker Fiat Chrysler Automobiles, which Elkann is busy trying to combine with France’s Peugeot. Offloading PartnerRe, even at a cut price, gives him one less headache.

That all gives Derez plenty of leverage to renegotiate. As a mutually owned insurer he doesn’t report to shareholders. But he’d be mad not to strike while the going is bad.

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