XL/CS FP – OG Risk Arb Initial Deal View
XL/CS FP – XL = $57.60. Cash Merger. As XL is a Bermuda corporation, the shareholder vote required is majority of the vote cast assuming more than 50% of shareholders vote; the deal price reflects a 33% premium to XL close on 3/2/2018; XL trades approx. 2,309,679 shares per day and has a short interest of approx. 4%; we will initially use a XL break price or $42.31 – a recent low; the deal will be financed in EUR $3.5 B of cash on hand, EUR $6.0B from the anticipated US IPO and related transaction of CS FP, and EUR $3.0 B of subordinated debt (all backed up with a EUR $9.0 B bridge loan); the confidentiality agreement is dated 1/16/2018; we note that CS FP has traded down on some analyst saying the acquisition price is high but we note the market often assumes the probability of an overbid is higher for reinsurance deals; CS FP IR said that there was not an auction and this deal was done on a friendly basis but we note that the merger agreement makes reference to how to deal with other confidentiality agreements in the no solicit section implying there may have been some sort of a process in the past; the merger agreement allows dividends to continue to be paid up to $0.22 per quarter.
Initial deal view. OG Risk Arb will initially use an estimated close price of 9/1/2018 in line with the parties’ closing guidance in the deal press release of 2nd half of 2018 (we note that in the deal slide presentation it says expected close is end of 3rd quarter or 4th quarter 2018 (see p. 12); and in note 3 to the slides it says expected close is the end of 3Q2018). CFUIS is probably not required as XL is a Bermuda corporation. MOFCOM may be required as both companies do business there but do not provide sales numbers there. EU approval may also be required. Neither EU or MOFCOM are listed in the merger agreement which list certain required approvals but the merger agreement refers to a Schedule I with further required approvals which are not disclosed. CS FP IR is not aware of MOFCM or EU being required but said he does not know the details of the regulatory approvals. The merger agreement notes that insurance approvals are needed in NY, DE, TX and LA and financial approvals are required in Bermuda, UK, the Society of Lloyd’s, Switzerland and Ireland. We will initially use a 20% probability of a 2nd request as there are numerous strong competitors in the markets in which the parties compete. OG Risk Arb will initially use a 95% probability of deal close.