No word yesterday from the rival camps but the way the share prices of QBE and IAG reacted yesterday, there’s obviously a lot of behind the scenes work going on.
So a third and final offer might very well be on the cards by the time the deadline of next Monday for the second offer, that was announced Tuesday, is due to expire.
QBE shares reversed their down day Tuesday and added 30c to $23.20 while IAG rose 19c to $4.38, which is about where it traded for much of Tuesday before it fell away in late trading.
Although it says it wants a recommendation, QBE says its proposal remains on the table until Monday despite the forthright rejection of IAG’s board.
The offer, as presently presented to the market, is faintly hostile: it has a take it or leave it tinge.
The board of IAG obviously believes the bid is opportunistic and that was the reaction from some broking analysts yesterday: they could all see the logic, they could all see some competition problems, and they could all see QBE getting IAG for a steal at present prices.
Keeping the proposal open in such a way is not the friendliest tactic, while QBE’s decision to publicise its own deal was also attacked by IAG’s board, which had agreed to confidentiality. Both sides admit there are substantial cost savings on the table from combining the businesses.
IAG would be part of an internationally focused group, while an enlarged QBE would strengthen its position in Australia’s car and home insurance markets. That’s where the problems with the ACCC would arise, not in the commercial or business side of the book.
QBE can afford a bit more, and IAG’s closing price on Tuesday indicates it might need to return with a better offer.
The QBE statement referred to a condition that it was "subject to business relationship partners".
This is believed to be a reference to the RACV in Melbourne which owns 30% of Insurance Manufacturers Australia, a joint venture with IAG that has thrown off considerable profits for the past three years. It’s a joint venture between the two in Victoria.
Could that 70% of IMA held by IAG be a frustration for QBE?
Credit Suisse said in a note to clients yesterday that the offer was "likely too low" for IAG shareholders.
"As such we view the QBE offer as opportunistic and unlikely to be accepted by IAG (which is has already rejected) or its shareholder (which we deem are unlikely to force the board to change its mind).
"Hence, we believe this merger as unlikely to proceed in the near-term, although we note that QBE can obviously re-visit the merger at any point in time. Perhaps at a point in time when their relative valuations make such a move more compelling."
And Goldman Sachs JBWere said:
"IAG: We believe the Board will demand a higher price than what QBE will be willing to offer, so the proposal is likely to lapse. However, any downside risk will probably be mitigated by the fact that many domestic institutions will be reluctant to stay underweight a stock that is "in play".
"QBE: We still see QBE stock as offering upside (it was looking attractive prior to today’s news and it is unlikely to push the IAG offer beyond the point of accretion). That said, we acknowledge that today’s news will probably delay the upside until it can show evidence that the approach to IAG does NOT reflect an absence of opportunities elsewhere.
"Therefore, even though we expect that IAG’s institutional shareholders will take quite a serious look at QBE’s proposal, we feel it is unlikely that the IAG Board will "come to the table" between now and next Monday.
"It is possible that QBE could nudge up its offer in the meantime, but we would see this as tactically pointless."
But Merrill Lynch had the most interesting take on the offer:
"Strategically we find it difficult to believe QBE would bring a takeover offer that is masquerading as a nil premium merger that is (in QBE’s view) in the best interest of all parties to the table, up the bid with a modestly higher second low ball offer, make it all public to engage IAG shareholders in the debate and pressure IAG’s Board and then walk away from the whole thing without lifting the offer on 21 April 08 when the offer folds.
"To us this seems likely step one in what we believe might ultimately prove to be a long drawn out battle.
"QBE has arguably delivered IAG the perfect get out of jail free card.
"The proposal will under pin the share price irrespective of whether QBE ultimately pulls out. The completion of the deal would no doubt see significant, perhaps necessary change forced upon IAG and could result in the businesses capital issues being resolved."
