Billionaire Agnellis Play Hardball with the French

(Bloomberg Opinion) -- Renege on a deal with the Agnellis and you can expect to pay for it.

Scion John Elkann has refused to renegotiate the Italian family’s $9 billion sale of its reinsurance business after the buyer, French mutual Covea, sought to revise the terms. A deal at a lower price could have made sense for both sides. The mystery is why Elkann saw more advantage in playing hardball, with the risk of the deal failing. Covea walked away on Tuesday.

If Covea had been smarter, it wouldn’t have agreed to pay so much for PartnerRe in the first place. The transaction was done in early March when it was clear that the coronavirus was taking hold outside Asia. But Covea wasn’t trying to wriggle off the hook entirely. It has a strategic goal to diversify away from its home market. Buying PartnerRe for less would achieve that.

Chiseling a bit off the price might still have left this a fair deal. Analysts at Bank of America Corp. value PartnerRe at $7.2 billion. They reckon the initial sale price was a little shy of what could have been justified, but if you factor in a correction in reinsurance stocks during the Covid-19 crisis then a 20% haircut is warranted.

Now consider the strategic value to the Agnellis of having a big pot of cash to deploy in a world where asset values have fallen almost everywhere. On that basis, even a less than fair price might have been worth taking.

So why not budge? One possible answer lies in the regulatory risks surrounding the deal. The chances of approval were harder to predict here than would usually be the case. The transaction would have taken Covea into new territory. Insurance industry supervisors would have been mindful of it stretching the purchaser’s management. It’s one thing for PartnerRe’s owners to accept a reduced price, quite another if the lower proceeds aren’t certain to land anyway.

Another reason for standing firm lies in the reputational risks of budging. Blinking in M&A carries long-term costs by undermining your credibility the next time you want to do some dealmaking. John Malone, the U.S. cable billionaire, let the sale of his Swiss business collapse last year rather than bow to pressure to cut the price. Perhaps it’s no coincidence that his next big transaction — last week’s combination of his U.K. assets with those of Spain’s Telefonica SA — was struck on favorable terms to his vehicle, Liberty Global Plc.

All the same, it’s still a puzzle that Elkann didn’t try harder to save this. The last explanation must be the possibility of financial redress. That wouldn’t come from the reported break fee — at about 2% of the deal, it’s puny. Juicy compensation would require litigation.

Exor NV, the Agnellis’ investment vehicle, doesn’t say in its statement whether it will sue. While neither side would relish a court battle, Elkann might calculate that Covea would want legal action even less than the Italian side. A settlement would therefore make sense. The talks may not be over yet.

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

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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