The QBE bid for its rival, IAG sparked a nice little rebound on the stockmarket yesterday and even the rejection of the $7.5 billion offer didn’t dampen spirits.
The market was up 55 points at the close on the All Ords as a bit of corporate action generated interest.
Investors were not all that fussed at the faulty thinking behind the offer: it’s anti-competitive, it’s opportunistic and it stands a good chance of being knocked off for those reasons.
It was a multi-billion dollar bid: a positive occurrence and a rare event in recent months as sentiment has been hit by credit crunches, poor lending practices by major banks, failed bid (Consolidated Media) and the margin and stock lending scandals which show no sign of easing.
QBE may be Australia’s biggest property and casualty insurer with most of its business offshore, but it wants its major local competitor in the struggling Insurance Australia Group.
It’s the second time QBE has made an offer for IAG in recent months: the first was an informal approach: the latest is a full on bid that has a hostile, take it or leave it tinge to it.
It’s a deal that has nothing in it for consumers and should be rejected on anti competitive grounds by the ACCC if QBE manages to reverse IAG’s initial rejection.
QBE has successfully expanded offshore into the US, UK and European business: it’s a top 10 global reinsurer and is believed to be the biggest operator on the Lloyds market in London.
IAG is Australia’s biggest motor vehicle and home insurance company and together the two would dominate those classes of insurance in this country: with the only competition coming from Suncorp, which took out Promina 18 months ago.
IAG has a joint venture in Victoria with the RACV motoring organisation, which would have to be surmounted in any successful bid.
If the deal is allowed and accepted general insurance would see the same sharp contraction in competition that we have seen in steel, airlines, milk, retailing at department store and grocery chain level, transport, and port operations, railways (freight) and a host of other activities.
It is another example of how the joys of a cosy, matey small market like Australia wins over even the most aggressive of companies. QBE has certainly been that with an active and vigorous expansion drive into Europe, the UK and the US markets in the past five years.
But now that’s got a bit tough, cash is building up from its extensive businesses, especially reinsurance, and rather than try and do another acquisition in the credit-stretched markets overseas, QBE is trying to control even more of the local market.
It’s only some 18 months since the acquisition of Promina (AAMI, Australian Pensioners, Shannons) by Suncorp Metway cut competition in the national general insurance market. Suncorp combined its Suncorp and GIO insurance businesses with those of Promina. That deal hasn’t been good for Suncorp shareholders as returns have been cut by bad weather, soaring claims and the impact of the credit crunch and slump in share markets.
QBE said IAG had rejected a proposal to take over the company for as much as $7.55 billion in cash and shares because it was inadequate. QBE said its offer would remain open until 5 pm Sydney time on April 21.
IAG is the country’s largest auto and home insurer and it told QBE on Monday that the bid was unacceptable.
QBE said it had offered 0.142 of its shares and 70 cents in cash for each Insurance Australia share.
IAG shares jumped by 11% to a high of $4.41 yesterday, QBE shares dropped 50 cents to $22.70 before recovering to close at $22.90, off 30 cents.
IAG closed at $4.19, up 33 cents: at that level IAG was worth $7.9 billion.
QBE justified the deal with the usual claims: "A merger would be transformational for both companies and create an enlarged group which would be in the top 15 global general insurers with a strong base in personal and commercial lines of business in Australia."
QBE shares have fallen 31% this year and is the worst performing stock in the six-company Standard & Poor’s Insurance Indexes: much of the selling has been driven by QBE’s exposure in the US and UK. The company also complained at the recent AGM in Sydney about the activities of short sellers attacking the stock.
There’s a large element of opportunism in the offer: IAG has been hurt (like Suncorp) by the rise in bad weather claims and lower stockmarket earnings. It was also caught by a sharp rise in bad weather claims in Britain, where it has been trying to emulate QBE and grow in motor accident and home insurance.
The share price has been weak and CEO, Michael Hawker is under rising pressure with broking analysts wanting his head. Michael Wilkins who ran Promina when it was taken over by Suncorp is now at IAG and is seen as the candidate to replace Hawker.
Broking analysts and big shareholders will support the QBE offer because it will generate fee income and will generate market returns at a time when financial sector shares are under considerable pressure.
Brokers and big shareholders don’t care about competition issues: but if this deal goes through competition for motor vehicle and household insurance will contract dramatically.
IAG clearly saw the opportunistic side of the bid and if QBE doesn’t significantly increase the offer price, it has no chance, before the competition regulator gets to examine it.
"The IAG Board carefully considered the proposal and concluded that the broad terms, in particular the price, were inadequate," the company said in a statement yesterday after
