Iag In $1.4bn Deal To Buy British Insurer
The Age
Tuesday December 5, 2006
AUSTRALIA'S largest general insurer will source 30 per cent of its revenue overseas after acquiring one of Britain's biggest insurance companies for $1.4 billion.
Shares in Insurance Australia Group (IAG) are barred from trading until tomorrow as the insurer tries to raise $600 million for the deal through a "book-build" - a bidding process that sets the price of shares to meet demand from institutional investors. The target, Equity Insurance, is Britain's fifth-largest motor insurer and largest motorcycle insurer.IAG will come up with the rest of the money either through borrowing or drawing from its own coffers.Chief executive Michael Hawker said IAG's size made it difficult to find Australian acquisitions that would not raise the interest of the competition regulator, but opportunities abounded offshore."Once we bought CGU, the opportunity to make material acquisitions in the Australian market became somewhat limited for competition reasons," he said.He said IAG's premium growth target of 15 per cent a year would increasingly push Australia's largest general insurer offshore, despite the likelihood of significant assets coming up for sale."Our ability to grow at 15 per cent per annum is no longer available to us in the Australian marketplace," he said. But he said Australia and New Zealand would remain IAG's "primary business focus".The deal values EIG at 11.8 times forecast earnings - in line with multiples for Australian insurance companies, but more than their British peers. At Friday's $5.64 close, IAG was trading at 11.8 times forecast earnings.Credit Suisse analyst Arjan van Veen said the premium made sense, given IAG's controversial acquisition in September of privately held insurance broker Hastings Insurance Services. The acquisition raised eyebrows not only because of Hastings' volatile earnings, but also because it exposed IAG to the highly competitive British insurance market.Mr van Veen said the EIG acquisition would help IAG capitalise on the footprint established with Hastings. "They bought something a couple of months ago which we had reservations about (but) they can get synergies out of the two and so justify both a lot more," he said.However, bringing Hastings and EIG under IAG's banner will generate savings worth only #13 million ($A32.66 million) - 4 per cent of the total acquisition costs. In comparison, synergies worth 15 per cent of the merger costs were expected from the Suncorp/Promina merger announced in October.IAG's offshore expansion - and its chagrin over the lack of domestic opportunities - add to concerns that Suncorp and Promina could find it difficult to sell assets at a good price if the Australian Consumer and Competition Commission forced them to do so.The watchdog is expected to demand some parts of the combined business be sold for the deal to go ahead, but IAG holds nearly 40 per cent of the general insurance market, so will probably be barred from buying anything substantive.Mr Hawker would not rule out bidding for assets that might be for sale through the Suncorp/Promina merger process, but said IAG was "absolutely going to be focusing on organic growth in our Australian and New Zealand strategy"."If we can get customers from our two competitors because of any disruption that might occur with them, then that, for us, is the best outcome," Mr Hawker said.KEY POINTS ? With local opportunities at a dead end, IAG looks to overseas expansion.? Equity Insurance is Britain's fifth-largest motor insurer and largest motorcycle insurer.
© 2006 The Age