(Bloomberg) -- PartnerRe Ltd. is betting the value of a mergerwith Axis Capital Holdings Ltd. is worth more in the long run thanan extra few dollars a share now. Shareholders may not agree.

The Bermuda-based reinsurer on Monday chose a sweetenedagreement with Axis -- valuing PartnerRe at about $126 a share,according to analysts -- over a $130 cash bid from Exor SpA. Thenew terms with Axis include an $11.50-a-share one-time specialdividend to supplement what had been an all-stock transaction.

PartnerRe says the gap between the two proposals isn’t as wideas it seems because the combination with Axis will create a muchstronger entity that can better compete in an overcrowdedreinsurance market. Exor, the investment fund controlled by Italy’sAgnelli family and known for its stake in carmaker Fiat ChryslerAutomobiles NV, doesn’t have significant reinsurance operations soit can’t offer the same synergies.

Still, Exor holds an advantage with a cash bid that won’t leaveinvestors waiting around for value creation, said Matt Carletti, ananalyst at JMP Securities, a unit of JMP Group.

“Shareholders have been pushing PartnerRe for something betterand I think this goes a long way toward getting there,” Carlettisaid in a phone interview. But “while everyone would agree thatAxis and Partner competitively are better off together than apart,reinsurance is still a very difficult industry right now. My guttells me investors might go for cash at this point.”

Pressing Management

PartnerRe hasn’t yet set a date for a shareholder vote on thedeal with Axis. PartnerRe fell 1.1% to $126.93 on Monday, whileAxis rose 0.2% to $52.41.

Investors seem to be signaling that the revised merger termsdon’t represent “significantly higher value” than Exor’s$130-a-share bid, Drew Figdor of TIG Advisors said on a conferencecall with PartnerRe management on Monday. Analysts from MacquarieGroup Ltd. and Bank of Montreal pressed management to explain whythey didn’t run a full sale process to determine the true marketvalue of the company.

PartnerRe Chairman Jean-Paul Montupet said Exor wasn’t willingto adjust its price even with due diligence and because of that,the investment firm wasn’t allowed to take an in-depth look atPartnerRe’s financials. While it may be true that Exor has alreadymade its final offer, it’s difficult for a company to commit toraising its bid until after due diligence, Sachin Shah of AlbertFried & Co. said in a phone interview.

“It’s like saying, ‘You have to write the check now and we’renot going to let you into the house,” said Shah, a specialsituations and merger-arbitrage strategist. PartnerRe is “forcingthemselves into a corner by having this vote. This lack of clarityand transparency leads me to believe that most shareholders shouldbe voting this down.”

Exor Options

PartnerRe shareholders will ultimately decide which transactionis superior so Exor is determined to pursue its transaction on theproposed terms, the company said in a statement on Monday.

Exor could still raise its offer. One option would be to modifyits proposal to include a special dividend as well. This wouldlower the company’s return on the deal, but because the dividendwould be paid by PartnerRe, Exor wouldn’t be responsible for comingup with additional financing, Shah said.

Exor may want to just go ahead and increase the price of its bidto cement a deal, Carletti of JMP said.

Tougher competition has spurred dealmaking across the insuranceindustry. Even Warren Buffett, chairman of Berkshire Hathaway Inc.,has projected a slump in results as hedge funds and pensionsseeking weather-related bets drive down policy rates and erodemargins.

Two Cases

Investors who believe in a bigger-is-better philosophy may bewilling to take a small hit on the takeover price now for a chanceto profit in the gains of the combined Axis-PartnerRe.

“The PartnerRe board is clearly making a long-term case” forcombining with Axis, said Cliff Gallant, an analyst at NomuraHoldings Inc. “I can understand what they’re saying. Five yearsfrom now, this is a brilliant deal for them. With that said, it’s abird in the hand versus two in the bush. In Exor’s point of view,and I think it’s a good point, they’re already offering the higherbid.”

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