IAG 1.80% $6.79 insurance australia group limited

to pay for paying dearly

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    IAG to pay for paying dearly
    By David King and Tim Boreham
    October 19, 2002
    INSURANCE Australia Group shares slumped to record lows yesterday as investors sent a clear message to the company that it had paid too much for the acquisition of key rival CGU Insurance.

    IAG shares slumped 15 per cent on resumption of trading after a two-day halt, closing 44c lower at $2.51 apiece.

    The company formally announced it had bought CGU and NZI Insurance – the Australian and New Zealand arms of British insurance group Aviva – for $1.86 billion.

    The acquisition will swell the annual gross premiums of IAG – already the biggest general insurer – to $5.6 billion from $3.6 billion currently.

    IAG went to the market to fund the purchase, issuing $500 million institution share placement at $2.55 – the bottom of the indicative range of $2.55 to $2.80.

    Market sources last night indicated 70 institutions – 50 of them local – had taken up the placement.

    The placement price was a 13.5 per cent discount to the company's trading price on Tuesday, the last full day of trading before being placed in a trading halt.

    Aviva executive director Phil Twyman made no secret that he believed the UK parent had got the better of the deal.

    "We said yes to you because of the price," he told IAG chief executive Michael Hawker at a media conference in Sydney.

    " But (we) also said yes to you because we knew that you would look after the customers we'd brought together over the last 100 years."

    Mr Hawker described the deal as "a transformation day for the company and the insurance industry in Australia".

    "Its one of those rare occasions where we've got a wonderful asset where both parties are very happy with the price," he said.

    The deal will increase the proportion of business written outside IAG's home state of NSW to 55 per cent, from 42 per cent currently. It will boost IAG's Queensland market share from 3 to 15 per cent and strengthen its position in the New Zealand market.

    To fund the purchase, IAG will raise about $1.1 billion in equity. This includes $380 million through a retail share offer, also at $2.55 per share, to open on November 4.

    It will involve $250 million in hybrid equities in New Zealand. The company will also raise $511 million in debt, as well as providing $124 million of internal funds.

    While $160 million of cost savings are expected, Mr Hawker was not specific about job losses.

    "There will be some job loses, we're changing the business, it would be ridiculous not to say that," he said.

    While the deal is subject to approval from competition regulators here and in New Zealand, Mr Hawker said he believed they were "pretty comfortable with the deal."


 
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