The QBE $7.5 billion "offer” for IAG is due to expire at 5 pm, Sydney time today, and Wesfarmers this morning confirmed its huge rights issue.
Wesfarmers and IAG are both companies where the share registers have a lot of small shareholders and any deal will need the strong input from the board and management.
That’s why Wesfarmers issue will be strongly supported, even if big shareholders might sound off.
Wesfarmers revealed plans to raise $2.57 billion from shareholders in a rights issue.
It told the ASX that the issue will be made at $29 a share in the ratio of one new share for every eight shares they own.
The WES shares were halted last Thursday morning with the price at $36.97 for the fully paids.
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IAG cannot be taken over until there’s a board ‘yes’ to any proposal. QBE knows that but analysts and big institutions are ignoring that fact as they try and whip up pressure for a full bid.
In both cases the reaction of the markets and investors will tell us a lot about the strength of character and belief in the future direction of our market by its players, big and small.
The markets and sentiment have taken a battering: all self-inflicted, from the failures of Allco Finance, MFS, Centro, ABC Learning, Opes Prime, Tricom, Lift Capital and the host of other leveraged groups that have been crunched. And the banks, led by the ANZ and the Commonwealth, haven’t escaped a pounding.
Short selling and stock lending have been blamed for some of the woes, but if executives and major shareholders weren’t trying to be greedy or over extend themselves with (what they thought were low risk) margin loans that turned out to be risky when values fell, the short sellers would not have had such an impact.
QBE and Wesfarmers were the targets of short sellers: indeed QBE’s chairman, John Cloney complained about it at the AGM earlier this month while Wesfarmers problems in refinancing up to $3 billion of short debt has seen its shares sold off by the ‘shorts’ trying to make a killing.
QBE’s odd offer for IAG has effectively driven the shorts out of both stocks, and Wesfarmers has decided to ask shareholders to put money where their mouths are and stump up for a rights issue that could be announced later today and could total more than $2.2 billion.
The company has already funded part of the debt with a $US650 million bond issue in the US that will see it pay an estimated 11% for the money.
Wesfarmers has its biannual investor briefing tomorrow and wanted to be in a position to have the issue details available so it can use the conference to sell major shareholders and analysts on the deal.
Investors will be looking for more detail on the boost expected to its Queensland coking coal and NSW and Queensland steaming coal exports from the world surge in coal prices. Some analysts reckon Wesfarmers coal business could generate upwards of a $1 billion or more in extra earnings over the next year.
That could be used to reinvest in Coles, pay a higher dividend and to help finance expansion in the coal business.
Comsec retail analyst Grant Saligari told the ABC’s Inside Business yesterday that the coal business of Wesfarmers is "certainly a very strong positive at the moment".
"It looks like, on our numbers, coal earnings are going to be significantly in excess of a billion dollars in financial year ’09 and that’s up from something around about the $400 million financial year ’08 on estimates.
"So, you know, that sort of cashflow contribution and also I think some of the delay to capital expenditure within the Coles retail businesses which we don’t think has occurred yet will obviously boost cash flows this year."
Meanwhile IAG chairman James Strong says it is not certain that QBE Insurance, or anyone else, will buy the company.
He told Inside Business yesterday that "This is a very significant company. It’s got tremendous market share in Australia. So it’s certainly not a question of regarding ourselves as sitting here for sale, it’s just the opposite."
IAG rejected QBE’s takeover bid on April 15 as "totally inadequate" because it was too small, didn’t offer a bigger enough premium to reflect the change of control and the obvious benefits to QBE that would flow from combing the two companies.
QBE’s proposal comprises 0.142 QBE shares and 70c cash for each IAG share. Based on QBE’s closing price on Friday, it values IAG at $4.06 per share, or a total $7.63 billion.
IAG shares fell one cent to $4.29 on Friday while QBE added 9c to $23.64.
Mr Strong said: “My job as chairman is, first of all, to have regard to the best interests of shareholders and that’s always the biggest issue for a board. We’ve told QBE what we think of the proposal that they made to us and that’s very clear.
"You know, one per cent above the market price, I don’t need to comment further about that. What QBE does is a matter for them. We are getting on with running the company and we believe that improvement’s starting to come through the company."
