Iag Spurns Qbe's Final Offer

Sydney Morning Herald

Tuesday May 20, 2008

Danny John

THE global insurer QBE is on the verge of walking away from its hoped-for merger with its domestic rival, Insurance Australia Group, after its target yesterday rejected a third - and seemingly last - takeover offer worth $8.7 billion.

With the prospects of an agreed deal rapidly diminishing in the high-stakes, poker-style gamble being played out, QBE declared a slightly sweetened share-and-cash terms offer tabled at the weekend as "final", in a sign it was not prepared to go any higher.

QBE's chief executive, Frank O'Halloran, indicated in a statement to the stock exchange that the five-week battle was nearing its end, even if it meant QBE would withdraw from the fight.

"QBE considers its final proposal is fair and reasonable, given IAG's declining profitability in the past three years and its recent profit downgrade," he said.

IAG, which has been hit with huge claims for storm damage at the same time as its much-vaunted expansion into Britain has yet to pay off, countered by stating that the terms still "fell short of fair value".

Its board is due to give its formal response to QBE after a board meeting in New Zealand today , but it is almost certain to maintain the hostile stand-off by making it clear that a much higher bid is required.

Analysts say IAG wants about $5 a share, which would value it at $9.45 billion - $700 million more than QBE's latest approach and nearly $2 billion more than the insurer was worth just more than a month ago.

The response by investors and analysts was almost equally emphatic, with market watchers saying that unless both sides were prepared to compromise the bid was effectively dead. Goldman Sachs JBWere said the initial response from IAG did "not sound promising".

"We believe that many of IAG's institutional shareholders will want the board to engage with QBE but we are not sure this will be enough to bring it to the table," the broking firm said.

After setting IAG a deadline of 5pm yesterday to accept a lower proposal made five weeks ago, QBE secretly approached IAG on Friday with an improved deal of 0.145 of one of its shares plus 90c in cash.

That was an increase of 8 per cent on its second offer that was tweaked by QBE after its initial confidential advances on April 11 opened with a "nil premium" merger proposal. That was rejected by IAG as far too low and inadequate.

Since then, IAG has steadfastly refused to engage with QBE on its plan to create a near-$30 billion internationally and domestically dominant insurer unless it made an offer IAG felt reflected the group's full value.

Yesterday, it ramped up the pressure on QBE to go one step further and reopen the brief negotiations in which both sides took part on Sunday to see if an agreed deal could be reached.

By doing so, the IAG board, led by its chairman, James Strong, has opened itself to strong criticism by investors if QBE does withdraw its offer.

After another earnings downgrade three weeks ago, IAG's share price has been propped up by QBE's bid, having risen from just less than $4 at the start of hostilities to highs of $4.45.

IAG's shares shed 23c yesterday to $4.20, or 40c less than the initial value of QBE's revised terms. QBE lost 15c to close at $25.40. Based on the value of the share swap and cash payment offer, that puts a nominal price of $4.58 on each IAG share.

© 2008 Sydney Morning Herald

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