EXOR Investment Case Updates

Exor: Covea will not acquire PartnerRe

12 May 2020

Today Exor announced that Covea had decided not to go ahead with its plans to acquire PartnerRe, a fully owned reinsurance business of Exor. No formal reasons have been provided, although given high macro uncertainty on the back of COVID-19 pandemic and rising risks of higher payouts on insurance claims (business interruptions) we think Covea either tried to re-negotiate the purchase price or faced its own challenges in completing the deal.

Technically, the news is negative for Exor simply because the value of PartneRe is probably going to be lower if it were to sell it again right now. However, the total amount of cashflows that PartnerRe can generate over its life has not materially changed, in our view. So its fundamental value should not change just because Covea decided to walk away from the deal.

Besides, $9bn price that Covea was ready to pay for PartnerRe does not look like an exceptional price. PartnerRe had a book value of $6.6bn at year-end 2019 which has increased by 16% (including dividend payments) since Exor took over. It has generated about 12-14% ROE.

We also like the fact that Exor did not agree on lower price (if such possibility existed) as a long-term business owner its management should see the value that PartneRe generates for Exor. PartnerRe provides Exor with important float and dividend stream which management can then re-invest in other portfolio companies, acquire new companies or distribute to its own shareholders.

Summary of Exor investment case

Exor is a publicly listed investment vehicle of the Agnelli family (founding family of Fiat which holds 53% in Exor). Its core holdings include reinsurance business PartnerRe (100%), Ferrari (23%), FiatChrysler (FCA) (29%), CNH (27%), Juventus football club (64%) and a number of smaller private investments.

Exor has delivered 18.9% annual compound growth of NAV per share since it went public in 2009 beating MSCI World Index which grew 10.8% per year over the same time period. Total shareholder return was higher boosted by annual dividends (0.5-1% yield).

For the past 10 years, Exor has been led by a young, ambitious CEO – John Elkann who was groomed for this role by his grandfather – legendary CEO of Fiat Gianni Agnelli. Elkann understands the crucial role of capital allocation for shareholder value creation and is often refers to Berkshire Hathaway as a corporate model.

We expect discount of Exor to the sum of values of its portfolio companies to narrow over time which provides the first source of upside to its shareholders.

The second source of upside comes from continued growth of NAV – should it match its historic average – Exor’s NAV would double in four years.

In highly uncertain times of pandemic, the additional benefits of holding Exor is the value of its wide network of contacts across Europe which should help it to find new attractive deals that are unavailable to an individual investor.

Exor’s management stands out in taking long-term view and focusing on building great businesses, paying special attention to corporate culture of its investee companies. The company has strong alignment of interests between management, shareholders and holding companies.

DISCLAIMER: this publication is not investment advice. The main purpose of this publication is to keep track of my thought process to better assess future information and improve my decision making process. Readers should do their own research before making decisions. Information provided here may have become outdated by the time you read it. All content in this document is subject to the copyright of Hidden Value Gems. The author held a position in the stock discussed above at the time of writing. Please read the full version of Disclaimer here.