Last week, QBE said this in its letter revealing it had approached Insurance Australia Group (IAG) about a merger which valued IAG at around $7.5 billion in cash and shares.
"QBE has advised IAG that its proposal is open until 5:00pm on Monday, 21 April 2008."
It wasn’t qualified or hedged, just a straight take it or leave it statement in the letter of April 15.
Now having had its bluff called by IAG, QBE has decided to extend the suggested offer by two weeks, to May 5.
No explanation for the about face, no sign of documentation or supporting information for a deal forthrightly rejected by the IAG board as being inadequate and clearly not enough at a premium of 1% over the IAG price the day before the offer.
QBE had offered 0.142 of its own shares and $0.70 in cash for every IAG share.
QBE did not change the terms of the proposed offer but said it was willing to discuss the proposal with IAG.
It said in yesterday’s statement:
To keep the market informed, QBE advises that its proposal to merge with IAG via a scheme of arrangement, which was open until 5:00pm yesterday and was rejected by the board of IAG, has at this stage been extended to 5:00 pm Monday, 5 May 2008.
QBE extended its proposal as QBE believes the proposal represents a very attractive and unique opportunity to create a highly complementary global insurance business, which for IAG shareholders would:
- Be substantially and immediately earnings accretive in year 1;
- Provide significant benefits from QBE’s proven track record of successful integrations while sharing in the estimated $300 million of annual net pre tax synergies by 2010 and the excess risk margin diversification benefits of over $400 million that are expected to be realised from a merger of the two businesses;
- Provide the opportunity to be part of a merged group that is ranked in the top 15 global general insurers;
- Provide access to QBE’s strong international platform for future profitable growth and diversification;
- Provide approximately a 12% premium above the three month VWAP prior to the proposal (a realistic measure given the current market volatility) – in addition to receiving IAG’s final FY08 dividend; and
- Represent over 25 times FY08 IAG’s earnings and over 14 times FY09 IAG’s earnings based on analyst consensus estimates. QBE understands the FY09 estimates assume a lower level of catastrophe claims. QBE’s proposal takes into account IAG’s statement in February 2008 regarding profit improvements in2H08 and FY09.
While QBE acknowledges that 2007 and 2008 to date has been a more challenging period for the insurance industry in Australia, QBE has announced record profits in 2007 (up 30% from prior year) and record diluted earnings per share (up 25% from prior year).
QBE said in the statement that during the past four years of increased catastrophe claims for the industry, QBE’s profit has increased by 237% in total.
This compares with IAG’s profit which has declined by 17% over the three years to 30 June 2007 and is expected to decline by 44% for the year to 30 June 2008 based on analysts’ consensus estimates – a combined decrease of 53% for the four years to 30 June 2008.
Mr Frank O’Halloran, QBE Group CEO, said: “When contrasted with a pure standalone option for IAG, our proposal allows IAG’s shareholders to participate in immediate and sustainable wealth creation through QBE’s global and product spread".
He added "We remain interested in seeing through our proposal if a friendly merger through a scheme of arrangement can be agreed. In any event, QBE will continue to focus on converting other opportunities in various parts of the world.
"As previously announced, the proposal is subject to IAG board recommendation, satisfactory due diligence, discussions with business relationship partners and signing a merger implementation deed (which would contain conditions including APRA, ACCC, NZ Commerce Commission and other regulatory approvals).
"Because of this, the need for normal shareholder and court scheme approvals and the provisions of any merger implementation deed if one were agreed, there can be no assurance that the proposal will proceed.
"QBE reserves the right to extend the period during which it is willing to discuss the proposal with IAG."
That final sentence was missing from last week’s presumptive attempt to stampede the IAG board into dealing with it.
But you’d have to ask why a company which a week ago was adamant the offer would not be extended now wants the right to keep going.
I know its all about tactics and the sort of stuff loved by investment bankers and brokers plus traders, but the fact of the matter is IAG has such a large base of small shareholders that QBE will need a strong board recommendation and the only way to get that is a substantial increase in price.
IAG won’t be won cheap, and yet that’s what QBE seems to be setting out to do. It hasn’t been very clever so far.
QBE shares eased after an early rise yesterday: they fell when the extension was revealed late morning after rising above $24 for the first time. They ended down 21c at $23.60. IAG shares were firm early as well but they also eased to finish off 1c at $4.35.
