Insurance Australia Group’s 900,000 shareholders and QBE will get more information later today on just why the latest version of QBE’s mooted bid is inadequate.
As anticipated by the market, QBE yesterday upped its suggested offer for Insurance Group of Australia yesterday by around 10%, and IAG said no.
QBE’s new offer is claimed to value IAG at $8.7 billion, at least a $1 billion higher than its first approach five weeks ago and $400 million more than the group’s overall value based on last Friday’s closing share price of $4.43.
It has to be remembered that the bid isn’t an actual offer, it’s just one of those "look we are thinking of offering around this amount, and should that please you, we can start talks to finalise it into an actual offer".
QBE CEO Frank O’Halloran though made it clear this was the last "offer" in this version of the suggested deal when he used the word "final" in the announcement yesterday.
It can’t really be ‘final’ because aq full complete offer proposal hasn’t been made by QBE. The ASX and ASIC should really tell QBE to put up real money and make a proper offer, or go away.
And those journalists and brokers criticising IAG’s board for not allowing shareholders to decide on the QBE "Offer" should take a cold shower and reread QBE’s statements and the Takeovers Code. It will be enlightening.
QBE kicked the current bidding situation off on April 15 when it revealed the possible bid after secret talks with IAG’s chairman, James Strong.
The suggested offer was 0.142 of its own shares and 70c in cash for each IAG share: a value of around $4.33 at the start, but that has bumped around as the QBE share price has moved.
IAG refused to enter into further negotiations about the ‘offer’, saying that it is too low and undervalued its business.
QBE’s latest ‘offer’ is 0.145 of QBE’s stock plus 90c in cash which puts a base value of $4.60 on IAG’s shares: and totally worthless because it is incapable of being made to IAG in its present form.
The amount is in the mid-range of the target price which the market felt that QBE could afford without diluting its own earnings in the first year of the proposed acquisition.
IAG’s share fell 21c to $4.22 as investors signalled that the bid was coming to a climax and that QBE may well succeed this time. QBE shares rose 14c to $25.69.
But in the afternoon IAG shares rose, reaching $4.33 and QBE shares also eased a touch to $25.66 as investors started to have doubts.
QBE needs the IAG board’s favourable recommendation because a hostile bid will not succeed in moving the 900,000 small shareholders. Big institutions and top end investment analysts won’t have much influence on these smaller holders.
In its statement to the ASX yesterday, QBE said it had had further talks with IAG over the weekend but that its chairman James Strong had again rejected the deal, saying they were well short of expectations.
Because QBE has declared its latest approach ”final" there normally can’t be any further increase in the ‘offer’ price, so a formal rejection from IAG later today will almost certainly see QBE walk. But the reality is QBE can remain in the hunt for as long as it wants: it hasn’t made a formal offer, so there’s nothing there to declare ‘final’.
The IAG share price will tumble as a result, but if you look at some recently rejected deals, there’s a mixed outcome. Qantas and Orica shares are lower than the offer prices, but Flight Centre’s shares have bounced sharply since two private equity deals were abandoned last year.
APN News and Media is also well under its suggested deal price of $6.20 a share. But in the cases of APN, Orica and Qantas there are some market factors, such as high oil prices or a sluggish US economy and media markets to account for some of the decline.
IAG is in the midst of the low part of the insurance cycle resulting from claims inflation, falling premium income and intense competition in some lines, plus some troubled areas (such as NSW and UK personal lines due to floods and bad weather) as well as falling returns from financial markets because of the credit crunch.
These are also hitting QBE, but because it has a different business mix to IAG, with less involvement in Australian personal lines, the damage isn’t as dramatic.
But like all clever bids, it’s opportunistic in the same way as the Westpac bid for St George is opportunistic. Westpac, unlike QBE, has made a formal offer, but not final.
QBE chief executive Frank O’ Halloran again said that the ‘offer’ was a far and reasonable one given the background of IAG declining profitability over the past three years and its latest earnings downgrade.
But unless there’s a change of heart, the detailed reply from IAG later today won’t make happy reading at QBE.
