Axa's XL deal

How to Wind Up Your Shareholders in Two Steps

XL deal is bigger and more expensive than investors expected.
Photographer: Carla Gottgens/Bloomberg
At Closing, March 22nd
21.80 EUR
At Closing, March 22rd
55.35 USD

One way to upset your shareholders is to do a far bigger deal than what they thought you'd consider. To get them really fired up, you could overpay at the same time. Axa SA's newish CEO Thomas Buberl has chosen to do both with the $15.3 billion acquisition of U.S. insurance peer XL Group Ltd.

Axa didn't appear to be seeking major purchases. The market hadn't been primed to expect any deals much larger than 1 billion euros ($1.2 billion). By contrast, XL will radically reshape its new owner. The target specializes in property and casualty insurance -- fire, theft, and disaster -- and it is these lines that will now dominate Axa rather than life insurance and savings.

Tail Risk

Axa's bid for XL Group comes after the reinsurer has lagged the index in recent years

Source: Bloomberg

True, the deal means more scale and diversification, an advantage in underwriting bigger and more complex risks for corporations. The shift to insurance from savings means Axa's fortunes won't be so tied to financial markets. The French company's cost of capital should, in theory, fall. The deal also finds a use for the proceeds from the planned sale of its U.S. insurance and asset management business.

Still, it's a lot to take on for a company long out of the habit of large scale M&A. The price offers no mitigation. Axa insists the deal will generate a 10 percent return, but the specifics aren't immediately clear. It argues that the terms equate to just 11 times XL's earnings after adding $400 million of annual synergy benefits. That compares to multiples of about 13 times or more for XL's U.S. peers based on current year forecasts.

The snag is Axa is still paying rather more than what the market reckoned XL was worth. The premium is 69 per cent -- or $6 billion -- more than where XL was trading at the start of the year. U.S. stocks were flat over the period. The financial benefits, a quarter of which come from hard-to-achieve revenue gains, are worth probably just over half that premium on a present-value basis.

The deviation from Axa's M&A strategy plus the apparent value destruction help to explain investors' reaction: Axa's market value fell 4.9 billion euros ($6 billion) to 56 billion euros on Monday.

Why the high price? Axa probably had to see off close competition in an auction. Allianz SE was also interested in buying XL, Bloomberg News reported in February. After Phoenix Group Holdings' purchase of Standard Life Aberdeen Plc's life business and Softbank's interest in Swiss Re AG, interest in insurance businesses is clearly reviving.

XL has served shareholders well in extracting a decent price. Allianz seems to have shown some discipline. All Buberl has shown is he can, well, win an auction. Strangely, the German insurer was the biggest gainer in the Bloomberg Europe 500 Insurance Index on Monday. The biggest loser? Axa.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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