Axa CEO Thomas Buberl faced a barrage of questions from analysts after his company's decision to buy Bermuda-based insurance group XL Group Ltd for $15.3 billion sent shares crashing by 9.7% on March 5.
The French insurance group's share price closed at €22.62 on March 5, compared with a March 2 closing price of €25.05. Among the criticisms of the deal were the high price and the fact that Axa spurned the option of returning capital to investors through share buybacks.
One analyst told S&P Global Market Intelligence that "it is quite an expensive deal" and added that a share buyback would have been "the obvious alternative." The analyst noted that Axa is acquiring XL at roughly 1.5x book value and 15x price/earnings before synergies are taken into account, when Axa's own shares were trading below book value.
The per-share price also represents a 33% premium to XL's March 2 closing price, and a premium of more than 54% relative to XL's $37.34 Feb. 6 closing price, the day before reports emerged that it was a takeover target. XL was up about 29% at $55.84 as of just before 1:30 p.m. New York time.
"Shareholders would have been better off with buybacks," said the analyst, who asked not to be named. But speaking to analysts March 5, Buberl insisted that Axa's strategy was to put attractive deals ahead of repurchases.
"We have been more than clear that share buybacks are an option but are not our preferred option and that we would always take the option of reinvesting into the business as our priority," he said. Buberl added that the deal value of 11x price/earnings after synergies are accounted for was "an attractive opportunity relative to our own P/E," and that the return on the investment would be 10%.
He did say he would not rule out share buybacks in the future.


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Axa also faced questions about why it had done such a large transaction when it had guided analysts that it was targeting bolt-on acquisitions of between €1 billion and €3 billion.
"One would rather have expected them doing three midsized, €2 billion or €3 billion acquisitions and not go for this big one," the analyst told S&P Global Market Intelligence.
Responding to a question about the apparent shift in acquisition approach, Buberl said: "I can understand that it irritates you because big deals are always deals that hardly any people like. But let's be realistic. When you have the ambition to grow in the commercial lines space, you will find there are not many companies and not many companies of the quality we wanted."
Axa views the deal as attractive in part because, along with its listing and sell-off of its U.S. life operations, which will partly fund the XL deal, the acquisition allows the combined group to shift its exposure toward nonlife insurance risk and away from investment risk.
The timing of the deal alongside the U.S. life move meant that "it seemed like the perfect deal at the perfect time," Buberl said, adding: "You can do all your shifting in one go, which to my mind is much better than doing it in pieces and always being disturbed by integrations. We do it once, we do it quickly, we focus ourselves on the existing business."
The shift to nonlife was one of the positives of the deal, the analyst said: "I always got the sense that underwriting risk is the preferred exposure for investors versus investment risk. This [acquisition] will reshape the profile a bit because you will have a more P&C-geared company and it will be less life and savings."

