PartnerRe to Diversify Through Paris Re Acquisition

On July 5, 2009, Bermuda based reinsurer PartnerRe Ltd. (PRE) reported that it has agreed to acquire Paris Re, a French-listed, Swiss-based diversified reinsurer in a succession of transactions. The stock-for-stock transaction will exchange 0.30 of PRE's common shares for each Paris Re common share outstanding. The total value of the transaction is expected to be approximately $2 billion.

We think this will help PartnerRe's visibility in a wider market and strengthen its operation to weather the ongoing market volatility.

Initially, PRE acquired approximately 6% stake of Paris Re in a stock-for-stock transaction at the 0.30 exchange ratio. The company intends to acquire an additional 57% of Paris Re's outstanding common shares at the same exchange ratio. The block transaction is expected to close in the fourth quarter of 2009.

Prior to closing of the transaction, Paris Re will pay $310 million or $3.85 per share to all of its shareholders. Following the closing of the block purchase, at the same terms, PRE intends to commence a voluntary exchange offer for all remaining Paris Re common shares.

This transaction is expected to close in the first quarter of 2010. After the company completes owning at least 90% of Paris Re's outstanding shares, it intends to acquire any remaining shares through a compulsory merger under Swiss law at the same exchange ratio.

We remain positive on PRE due to its global operating platform, diversified portfolio (by product as well as geography), rigorous underwriting process, prudent capital management, solid ratings and reputation in the market, which will enable it to take advantage of the stronger demand and better pricing being witnessed currently in the reinsurance markets. However, we suspect that additional losses in the investment portfolio and the current negative sentiment for the financial industry as a whole may somewhat weigh on the share price.

The Paris Re acquisition will further support its already successful strategy, though, we cannot rule out the possibility of integration risk. As such, we expect the company to perform better compared to its peer group in the coming quarters. We are maintaining our Buy recommendation on the shares of PRE.