Insurance Australia Group Ltd (IAG), the country's top home and car insurer, rejected as too low a A$7.3 billion ($6.8 billion) bid from bigger rival QBE Insurance Group Ltd, sending IAG shares up more than 14 percent on expectations of a higher offer.
Australia's A$30 billion general insurance industry, with more than 100 providers, has been battered by bad weather, while intense competition has squeezed premiums, forcing companies such as IAG to expand into Asia and Europe and triggering talk of mergers at home.
QBE, which has acquired 110 companies in the past 25 years, has been cited as a potential buyer of IAG after IAG's shares slid last year following profit declines and as its UK expansion failed to meet market expectations.
"IAG has been a disappointing business for the last two-and-half years and I think the board will be happy to let the thing go at the right price," said Anoop Kalra, a fund manager with Souls Funds Management, which owns QBE shares.
He said the offer looks generous but there was potential to sweeten it by 5-10 percent or to about A$4.40 per share. At that price, IAG's price-to-earnings ratio for fiscal 2009 profit would be about 13, a multiple at which IAG has historically traded at, Kalra said.
QBE offered 0.142 of its own shares and A$0.70 in cash for every IAG share. At current prices, the offer is worth about A$3.93 a share. IAG shares were up 11 percent at A$4.29 at 0257 GMT, suggesting investors expect a higher offer. The broader market was up 0.9 percent.
IAG had surged more than 14 percent after the announcement, giving it a market value of A$8.2 billion. But the shares are still down about a third from their 2007 high. QBE has a market value of about A$20 billion. "There could be another offer down the track," said Lucinda Chan, a division director at Macquarie Equities. "IAG might think they might be worth a lot more."
QBE's approach comes after Suncorp-Metway Ltd acquired rival Promina Group last year for A$7.9 billion. The industry's net profit fell 22 percent to A$1.13 billion by the September 2007 quarter over the previous three quarters.
A potential deal would give QBE about 40 percent market share in personal motor vehicle insurance in Australia, a 42 percent share of personal home insurance and a 33 percent in commercial lines, Daiwa Securities analyst Johan Vanderlugt said in note to clients.
Analysts said any deal is unlikely to face competition issues as QBE is primarily a commercial insurer focusing on property, while IAG, with its NRMA and CGU brands, mostly focuses on home and auto insurance. "The strategy here is not the big issue. The big issue is price," IAG Chairman James Strong told Reuters. "There is generally a healthy expectation on behalf of shareholders of upfront payment."
He declined to say if IAG would engage with QBE if a higher offer was made. "The current share price reflects a low point in insurance cycles in our core markets and higher than normal frequency of severe weather events in the past year," Strong added.
QBE shares fell as much as 3.7 percent to A$22.20, taking the stock's losses this year to about 33 percent. QBE's lower-than-expected 2007 profit and its exposure to the sluggish US economy have made investors wary about its short-to-medium term growth outlook. QBE said the proposed deal would have led to pretax cost savings of about A$300 million by 2010.