Axa's XL Buy Gets Skeptical Analyst Reviews

Axa S.A.’s $15.3 billion bid
to buy Bermuda-based XL
Group Ltd. has some
observers questioning the
logic and pricing of the deal.

The Paris-based insurer’s stock took a header after the deal was
announced Monday, dropping just under 10% for the day.

“They really did get hit quite a bit on the share price drop,” said
Brian Schneider, Chicago-based senior director for Fitch Ratings
Inc. “So the market doesn’t seem to like it.”

Investors appeared to balk at the sudden shift in course,
according to a research note Tuesday from Jeffries International
Ltd.

“Axa’s sharp fall yesterday suggests high level investor angst at
the unexpected acceleration in corporate and strategic actions to
reposition the group towards more underwriting risk,” the Jeffries
note said.

S&P Global Ratings Inc. on Tuesday placed Axa’s insurer financial
strength ratings on review with negative implications. The New
York based ratings agency said “the acquisition carries material
execution risk,” and “the transaction, if completed, could
materially weaken AXA’s capital adequacy.”

Axa said buying XL would result in property/casualty insurance
rising to half of its earnings from its current level of 39%.
Pricing also came under scrutiny.

The $57.60/share bid from Axa, Europe’s second-biggest
insurer, represents a 33% premium to XL’s closing stock price on
the preceding Friday.

“I guess it was on the high side, but we have seen similar prices
paid,” said Mr. Schneider. “For example, the price AIG paid for
Validus I thought was on the high side as well.”

Still, at 1.5 times book value, current valuations are not as high as
some of the values that were seen when some Asian buyers
were willing to pay two times book value for some properties,
Mr. Schneider said.

“In this case, they’re looking to get that bigger footprint and
larger, stronger multiline type of company, and there are not that
many ways they could get that done,” Mr. Schneider said. “In
terms of trying to make a big hit in the near-term, they had to
buy something big, and there’s not that many large properties
available. Given that, it required them to pay this type of a
premium.”

Macquarie Capital Ltd. in a research note Tuesday upgraded Axa’s
stock to neutral from underperform while remaining skeptical.

“While the logic for the transaction seems less than compelling in
our view and we expect the core business growth is weaker than
many believe, if the business pays down the leverage and the XL
combined ratio recovers, then the stock should recover,” the
Macquarie note said.

Reports after the deal was announced Monday also had analysts
questioning the price as well as the logic of the deal.
Still, Macquarie suggested the shift to commercial risks could help
facilitate growth.
“Given the large ticket size, we expect growth in large commercial
risks is easier, as these are broker-driven markets with regular
reviews,” Macquarie said in its note.
And there was one notable winner in the deal.
“For XL, I think it’s a good deal from a shareholder standpoint,”
Mr. Schneider said.