Iag Waits For Qbe's Next Move As Deadline Ticks Over

Sydney Morning Herald

Monday May 19, 2008

Danny John

THE $8 billion takeover battle that the global insurer QBE is waging for its domestic rival Insurance Australia Group is reaching a climax, with both sides under pressure to negotiate an agreed merger deal.

With the second public deadline set by QBE for IAG to accept its offer due to expire at 5pm today, it is unlikely that the tussle will continue for much longer, given the stalemate that has existed for nearly a month.

Analysts have indicated that a top-up price of about 10 per cent above QBE's initial offer could be enough to get the two sides to the table to thrash out an acceptable deal.

QBE is set to announce its latest intentions tomorrow, with market watchers indicating that the odds are moving towards a higher offer rather than yet another two-week extension.

It is thought unlikely that QBE's chief executive, Frank OHalloran - the architect of the group's global expansion, who has more than 100 acquisitions to his name - will walk away from a deal that would transform the prospects of both companies.

Daily movements on the sharemarket over the bid period have given a clear indication of the value that is now attached to IAG - the troubled owner of the NRMA Insurance brand - with the company's worth having risen by more than $600 million.

IAG's market capitalisation now stands at $8.3 billion.

However, its share price has largely tracked the value of the scrip-and-cash terms of QBE's initial offer first made public on April 15. Neither has the company's stock been able to break free of the bid price, with QBE's shares have risen in tandem.

IAG's shares finished last week at $4.43. QBE closed at $25.55, which values each IAG share on the bid terms at $4.35 - an 8c gap in IAG's favour.

IAG's inability to trade at a significant premium to QBE's offer has limited its board's ability to manoeuvre in preparing its defences.

IAG's chairman, James Strong, has maintained throughout the process that QBE's offer is too low and greatly undervalues the company, which has seen successive annual profits fall because of three factors: huge claims resulting from a series of devastating storms; weak performances from its recently acquired British division and a "soft" commercial insurance cycle in Australia.

While not challenging QBE's assertion that the two companies would make a good fit - IAG is still predominantly an Australian insurer compared to its rival, which has worldwide interests - Mr Strong has indicated that the next move has to come from the bidder.

The IAG board's two most significant weapons are its power of recommendation and its 900,000-strong band of retail shareholders who will closely follow the decision of the directors.

While price is the over-arching issue, IAG shareholders will be looking for some comfort in the next dividend, which is under pressure from falling profits.

IAG is only sustaining the existing level of payments by dipping into its reserves and analysts have raised concerns that this year's final dividend could be cut as a result of the latest profit downgrade.

© 2008 Sydney Morning Herald

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