Why Iag's Strong Is Between A Rock And A Hard Place
Sydney Morning Herald
Tuesday May 20, 2008
The chairman of Insurance Australia Group, James Strong, is playing a precarious game of brinkmanship. Should he continue to spurn the advances of QBE, his shares and those of 900,000 other holders are headed back below $4.
That IAG shares actually fell 23c to $4.20 yesterday after news of a higher, and final, takeover proposal from its suitor 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 after the IAG board meeting in New Zealand. It is shaping up as a marathon affair. Strong and his board will be painfully aware jobs are on the line whichever way they move. Under a QBE merger, most IAG directors and its chief executive, Michael Hawker, will be farewelled. And if IAG sees QBE off, the stock will drop and they will find themselves 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 only delivered a rash of 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 - we would have heard about them by now. IAG desperately needs some competitive tension inthis game.In its defence, the board may well baulk at recommending their shareholders accept QBE scrip. Although QBE is something of a black box - very poor visibility, with no one except its 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 would not be pretty for insurance premiums, particularly in commercial lines, 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 were concerned about QBE scrip they could cook up a QBE protected-share deal, a la Wesfarmers. Job done. Meanwhile, Strong and co could do better on the disclosure front. Frank O'Halloran has put the squeeze on his prey by raising QBE's takeover bid and declaring his increased proposal "final". QBE's chairman, John Cloney, met 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, it did not bother to tell the ASX before trading began yesterday morning. Even sloppier, QBE told the ASX about the proposal at 11.30am, 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 yesterday's discount in IAG for the diminishing likelihood of a deal, IAG shareholders are in for a hiding if QBE walks. IAG is tipped to earn 10c a share this year and 20c a share next year, which puts it on a price earnings ratio of 15 times earnings this year and 30 times next year. On an earnings basis this is no low-ball bid. Frank O'Halloran even looks a tad impatient going final so quickly - even on a Clayton's basis because he has made no formal bid - when he could have extended his "offer you make when you're not making an offer" once again. There is the possibility that QBE has some room to squirm by not making a formal offer but still labelling its proposal "final". It could, for instance, throw a final dividend into the deal - that way, O'Halloran can keep it final while letting Strong and his board save some face by winning better offer terms.
© 2008 Sydney Morning Herald
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