PartnerRe Ltd. is betting the value of a merger with AXIS Capital Holdings Ltd. is worth more in the long run than an extra few dollars a share now. Shareholders may not agree.

The Bermuda-based reinsurer on Monday chose a sweetened agreement with AXIS — valuing PartnerRe at about $126 a share, according to analysts — over a $130 cash bid from EXOR SpA. The new terms with AXIS include an $11.50-a-share one-time special dividend to supplement what had been an all-stock transaction.

PartnerRe says the gap between the two proposals isn’t as wide as it seems because the combination with AXIS will create a much stronger entity that can better compete in an overcrowded reinsurance market. EXOR, the investment fund controlled by Italy’s Agnelli family and known for its stake in carmaker Fiat Chrysler Automobiles NV, doesn’t have significant reinsurance operations so it can’t offer the same synergies.

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

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

Pressing Management

PartnerRe hasn’t yet set a date for a shareholder vote on the deal with AXIS. PartnerRe fell 1.1 percent to $126.93 on Monday, while AXIS rose 0.2 percent to $52.41.

Investors seem to be signaling that the revised merger terms don’t represent “significantly higher value” than EXOR’s $130-a-share bid, Drew Figdor of TIG Advisors said on a conference call with PartnerRe management on Monday. Analysts from Macquarie Group Ltd. and Bank of Montreal pressed management to explain why they didn’t run a full sale process to determine the true market value of the company.

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

“It’s like saying, ‘You have to write the check now and we’re not going to let you into the house,” said Shah, a special situations and merger-arbitrage strategist. PartnerRe is “forcing themselves into a corner by having this vote. This lack of clarity and transparency leads me to believe that most shareholders should be voting this down.”

EXOR Options

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

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

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

Tougher competition has spurred dealmaking across the insurance industry. Even Warren Buffett, chairman of Berkshire Hathaway Inc., has projected a slump in results as hedge funds and pensions seeking weather-related bets drive down policy rates and erode margins.

Two Cases

Investors who believe in a bigger-is-better philosophy may be willing to take a small hit on the takeover price now for a chance to profit in the gains of the combined AXIS-PartnerRe.

“The PartnerRe board is clearly making a long-term case” for combining with AXIS, said Cliff Gallant, an analyst at Nomura Holdings Inc. “I can understand what they’re saying. Five years from now, this is a brilliant deal for them. With that said, it’s a bird 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 higher bid.”