Strong Walking A Precarious Line In Face Of Bid

The Age

Tuesday May 20, 2008

Michael West

Make no mistake, Insurance Australia Group shareholders are in for a hiding if the bidder quits.

IAG chairman James Strong is playing a game of brinksmanship. Should he continue to spurn QBE's advances, his shares and those of 900,000 other holders are headed back below $4.

That IAG shares actually deflated 23? to $4.20 after news of a higher, and final, takeover proposal from QBE suggests the market thinks this deal won't happen - unless QBE goes hostile, that is.

If the market thought a hostile bid was likely, though, the stock would have gone up. Still, a deal is still odds-on. The answer could come this evening at the IAG board meeting in New Zealand. That is shaping as a marathon affair.

Strong and his board will be painfully aware that their jobs are on the line whichever way they move. Under a QBE merger, most IAG directors and chief executive Michael Hawker will be bidding farewell. And if IAG sees QBE off, the stock will drop and they will be in an untenable position.

At $4.60 per IAG share - the latest pitch from QBE - QBE is pricing the general insurer at 16 times earnings. That sort of price reflects a perfect turnaround as insurers generally trade on 12 times or thereabouts.

For its part, IAG has delivered only downgrades in the past couple of years so, in the absence of a suitor, it won't be visiting $4.60 again for a while. And no rival bidders appear to be coming out of the woodwork. IAG desperately needs some competitive tension.

In its defence, the board may well baulk at recommending that shareholders accept QBE scrip.

Although QBE is something of a black box (very poor visibility, with no one except chief executive Frank O'Halloran and his numbers man really knowing where all the obligations lie, or where all the bodies are buried if you like) it is also one of the most successful stocks on the market. Further, the synergies in this deal are compelling.

One big player eliminated from the market won't be pretty for insurance premiums, but it would be a sweet outcome for shareholders.

Nonetheless, Strong has made nothing of QBE's scrip in his defence. No other issues except price have been raised. And frankly, the price is high.

If IAG was concerned about QBE scrip, it could cook up a QBE protected-share deal, a la Wesfarmers. Job done.

Meanwhile, Strong and co could do a tad better on the disclosure front.

O'Halloran put the squeeze on his prey by upping QBE's takeover bid and declaring his increased proposal "final".

QBE chairman John Cloney met James Strong on Friday evening with the new pitch and IAG had all weekend to think about it. Then, as if market disclosure was an afterthought, did not tell the ASX before trading began yesterday morning.

Even sloppier, QBE told the ASX about the proposal at 11.30 yesterday morning while IAG did not get around to telling the market until 2.23pm.

When it did, the line was that the QBE pitch had been "marginally revised" from its original "nil premium" proposal. The fact is, even with the discount in IAG for the diminishing likelihood of a deal, IAG shareholders are in for a hiding if QBE walks.

? For an extended version of this article please go to theage.com.au/businessday

© 2008 The Age

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