Relatively surprising news broke over the past weekend that Exor (OTCPK:EXXRF) was in “advanced talks” to sell insurer Partner Re to the French insurer Covea Cooperations. Partner Re was purchased by the conglomerate with Italian roots less than five years ago in a move that was expected to be a permanent diversifying force out of the industrial companies that for decades was its mainstay.
I have written about Exor a great deal over time, including an overview of the company in July 2016 that argued it had three complementary forces in its favor: an aligned management with a smart capital allocator in John Elkann, a large discount to net asset value, and ownership of publicly traded companies that themselves traded at discounts to their intrinsic value. Since then, shares have increased from the equivalent amount of $36 to more than $80 per share. Shares today look fairly valued, but the stock is one that can be owned for years as management has proven adept at compounding the company’s value at a high rate. [Note: Exor’s main listing is in Milan where it trades under the ticker “EXO,” but they trade over the counter in the United States under the ticker “EXXRF.” Because the Milan shares are more liquid, I reference the price of those shares converted to U.S. dollars in the article.]
The sale of Partner Re, if it should be completed, comes on the heels of another enormous deal for Exor. Fiat Chrysler (FCAU) announced late last year that they would merge in a 50-50 deal with French giant Peugeot (OTCPK:PEUGF) that would also see shareholders of Fiat Chrysler receive a cash distribution prior to the consummation of the merger.
In light of these two major deals on the horizon, I wanted to take a look at Exor again, reviewing their effects on intrinsic value and Exor’s future prospects.
An Overview of Exor
Exor is a holding company to manage the wealth of the Agnelli family, which was largely achieved through a decades-long ownership of Italian automaker Fiat and other industrial investments. Since 2008, it has been run by Agnelli heir John Elkann.
Exor publishes its current net asset value twice per year, relying on the market price of publicly traded investments and an independent valuation for non-public investments.
Net Asset Value for Exor in both Euros and U.S. dollars. In comparison the MSCI All World Index in U.S. dollars has compounded at about a 10% rate over the same timeframe. Source: Compiled by the author from Exor financial filings.
Since 2009, net asset value in euros has compounded at about a 21% rate, although the stronger dollar brings this to 19% in U.S. dollars. The share price has compounded at a faster rate as the discount shares have traded at in the market has, slowly and irregularly, closed.
Exor’s current portfolio is dominated by Partner Re, Ferrari (NYSE:RACE), and Fiat Chrysler and also includes large stakes in capital goods company CNH Industrial (NYSE:CNHI), Turn-based soccer club Juventus (OTCPK:JVTSF), and a handful of smaller investments.
The composition of Exor’s gross asset value (top) and the details on net asset value and ownership of its various stakes (bottom). Source: Compiled by the author from Exor financial filings.
The Agnelli family owns 53% of Exor, while minority shareholders also have the opportunity to participate in the company. This structure is rare in the United States, but common in other parts of the world and particularly in Europe. Family ownership can have a lot of desirable characteristics, in particular for the corporate governance of the company. Family-led and owner-operated businesses have tended to outperform over meaningful periods of time, as this slide from a previous Exor investor presentation highlighted.
In the past, I have highlighted reduced agency costs and a long-term planning horizon as the biggest reasons why the outperformance has occurred.
Exor’s own record has been envious, despite starting with a mix of businesses with sub-par economic characteristics. At the formation of the group in 2009, its primary assets were commercial real estate broker Cushman & Wakefield (NYSE:CWK) and the sprawling industrial operations of Fiat, which included the Italian automaker, the core of what today is CNH Industrial and Ferrari.
A purchase of 71.5% of Cushman & Wakefield was completed in late 2006 by Exor’s predecessor company for $625 million and sold in 2015 for $1.3 billion. The rationalization for the purchase was obviously an effort to diversify the overall holdings of the company away from its core industrial base. That made the sale initially somewhat confusing, but I believe Elkann was being opportunistic. Under Exor’s ownership, the business had grown EBITDA by 51% and gained market share following the financial crisis. Valuations for similar businesses were strong, and I doubt Elkann felt much more improvement could be wrung out of the business, so he sold for a hefty gain.
Early in 2016, the proceeds of the Cushman & Wakefield sale were recycled to partially finance Exor’s $6.9 billion purchase of insurer Partner Re.
After having to raise its offer, Exor acquired Partner Re in early 2016 for $6.9 billion, a valuation of about 1.14x book value. The purchase allowed Exor to diversify more fully than its original Cushman & Wakefield acquisition did. I also think that the large investment side of a reinsurance operation was seen as highly complementary to Exor’s main business of managing the family’s investments. Elkann has pointed out in his letters to shareholders that Partner Re’s investment process has been partially re-thought and broadened to include more real estate and equities than from before Exor owned the firm.
Partner Re’s results have not been in any way a home run since it was acquired. In the face of higher catastrophe losses and weak insurance pricing, Partner Re has produced an average combined ratio of about 98% since 2016. Accumulated net income has been $1.6 billion, which by my math, has meant an average return on equity of about 7%.
Partner Re’s financial results summary. It was acquired by Exor in March 2016. Source: Compiled by author from Partner Re and Exor financial filings.
Despite Partner Re’s performance, the rationale for continuing to own the company is fairly strong. One reason is the obvious: Partner Re today comprises 28% of Exor’s gross asset value, providing important diversification against its industrial core of Fiat Chrysler, CNH Industrial, and Ferrari, which comprise 62% of gross asset value.
Beyond diversification, there is a lot of benefit that can be gained from an having an entity that manages a large investment portfolio within a larger platform that is itself managing investments. Take, for example, this comment that Elkann made in last year’s letter to shareholders:
In 2018 we started deploying part of our cash and cash equivalents, which have now grown to $306 million, into the equity portfolio that we manage for PartnerRe. At the end of March 2019, this investment portfolio has delivered a gross return of 56.2% in USD since its inception in 2017, and, in the period since EXOR also started investing, a gross return of 37.3%. The performance of MSCI World Total Return Index in those periods was 19.4% and 1.7% respectively.
Pricing is also beginning to firm in the reinsurance industry, and after dismal results in 2017 and 2018, it seems likely that Partner Re’s returns over a full cycle will be somewhat higher than the 7% it has achieved so far under Exor’s ownership, although it is doubtful it will achieve returns higher than 10%.
The Wall Street Journal has reported that Exor was not shopping Partner Re but was approached by Covea, which prompted them to begin talks. At a rumored price tag of $9 billion, the deal would value Partner Re at 1.36x book value versus the 1.14x book value that Exor paid in 2016. Counting the dividends it has received along the way, Exor’s return since purchase would be roughly 9% per year. Analysts at Merrill think the ultimate price tag will be $10 billion. That would place the deal’s value at 1.5x book value.
Compared to other large reinsurers, the valuation seems generous. According to Bloomberg, Munich Re currently trades for 1.26x book value, Swiss Re 1.31x, Scor 1.05x, and Everest Re 1.30x. However, the relatively recently closed transactions of AIG (NYSE:AIG) buying Validus and Axa buying XL Capital have both been at valuations of about 1.5x book value.
Given what we know, it’s very possible that Elkann’s view of reinsurance has shifted somewhat and he views the business as far more difficult than he originally assumed and is happy to walk away with a 9%+ return after owning Partner Re in a difficult period of heavy catastrophe losses.
Fiat – Peugeot Merger and CNH Spin-Off
Unlike the potential sale of Partner Re, the recent agreement to merge Fiat Chrysler and Peugeot together seems unambiguously favorable to Exor. Prior to closing the deal, Fiat Chrysler will distribute a special dividend equivalent to about $6 billion, of which Exor would receive $1.7 billion, as well as ownership of robotics company Comau. Exor’s stake in the combined company would fall from just shy of 29% to about 14 1/3%.
The companies are targeting early to mid-2021 for deal completion. The deal could face hurdles from European Union regulators given that the combined company would have about 40% of both the French and Italian auto markets. Probably more important to regulators will be how the companies plan to boost efficiencies without laying off thousands of workers and closing plants. My guess is that the deal is approved along with some explicitly enforceable promises related to plant closures and layoffs.
Those promises could eliminate some of the potential benefits of the tie up and the added scale it provides. But Exor does win big in the deal in having current Peugeot CEO Carlos Tavares run the combined company. Tavares became Peugeot’s CEO in 2014 and spearheaded a successful turnaround that included cost cuts and the company’s successful merger with General Motors’ (NYSE:GM) previous European subsidiary Opel.
Meanwhile, CNH Industrial is planning to split into two separate businesses. One business would own the construction and agricultural brands, including Case and New Holland, while another would own the commercial truck and powertrain business that includes Iveco and FPT Powertrain. The split makes a great deal of business sense as the agricultural and construction business is higher margin and should command a higher multiple, while the truck business could be an acquisition target post-separation.
Conclusion: Managing the Proceeds and Exor’s Current Valuation
In many ways, an investment in Exor today is predicated on how much trust investors have in John Elkann and the Agnelli family to continue managing the company’s transition.
While Partner Re is listed as 28% of Exor’s gross asset value, a sale at $9 billion to $10 billion would amount to anywhere from 31% to 33% of Exor’s gross assets. A further $1.7 billion could come into Exor if the Fiat Chrysler deal closes next year. And there is some possibility, although not in any way specific or on the immediate horizon, that one or both of the constituent companies comprising CNH Industrial could become takeover targets.
Elkann’s options for using this cash are also somewhat more limited than other companies. Paying a large, one-time special dividend would not make much sense for the Agnelli family, given their desire to have their collective finances run within the Exor umbrella. Similarly, a large share buyback would not make a great deal of sense at the size that would be needed to soak up the influx of cash coming into the company, unless the Agnellis wanted to take Exor fully private. Doing so, however, would make them even more dependent and concentrated on the industrial investments they have been trying to diversify away from.
That leaves the most probable course of action: some large investment in the future that would be transformative for Exor. That happened fairly soon after Cushman & Wakefield was sold. With equity valuations currently on the high end of their historical range (particularly in the United States), there is a good possibility that the proceeds are used to pay off Exor’s debt, perhaps buy back modest amounts of stock, and sit with a huge cash cushion for better deals to materialize in the future. This outcome, again, is one that requires investors to have an enormous amount of trust in Exor’s capital allocation decisions.
Using listed prices and a $9 billion value for Partner Re, Exor’s net asset value is currently about $108. That figure rises to $113 if a $10 billion valuation is assumed for Partner Re. Compared to the U.S. dollar equivalent price of the shares traded in Milan, Exor trades at between 73% and 76% of net asset value, compared to an average value of 65% since its 2009 inception.
Estimates of Exor’s net asset value made by the author at $9 billion and $10 billion valuations for Partner Re, market prices of listed investments, and the expectation that Exor has received dividends from current investments since their last report.
Those values make Exor at least a hold, and perhaps a buy given that it could hold a strong counter-cyclical value for those worried about high equity prices. Investing alongside proven capital allocators with a large war chest is not the worst idea one could come up with in today’s environment.
Disclosure: I am/we are long EXXRF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.