Wednesday April 16, 05:24 PM

QBE could offer $5 an IAG share: brokers

QBE Insurance Group Ltd could offer as much as $5.00 a share for rival Insurance Australia Group Ltd (IAG) and still make the acquisition earnings positive in the short term, analysts say. But they are unsure if the mega-merger will eventuate, with some musing that QBE, with its conservative approach to valuing targets, could find cheaper buys elsewhere. QBE's rejected proposal, which closes on Monday, comprises 0.142 QBE shares and 70 cents cash for each IAG share. Based on QBE's closing price on Tuesday, it equates to $3.95 per IAG share. Goldman Sachs JBWere (GSJBW) believes that while QBE has room to increase its offer, it is unlikely to stump up enough capital to satisfy the IAG board, which is adamant IAG's shares are undervalued in a tough market. IAG chairman James Strong acknowledged on Tuesday the merits of a tie-up between the two insurers, but only at the right price. In a sign the price might never be right, QBE indicated on Tuesday that it would not deviate from its usual deal requirement of achieving earnings accretion in year one. That gives it some room to move its offer upwards, but it would have to make some fairly aggressive assumptions to get much beyond $4.50, GSJBW analysts Ryan Fisher and Ingrid Groer said. "QBE is unlikely to push the IAG offer beyond the point of comfortable accretion for its own shareholders," the analysts said. "And with or without IAG, we agree with its assertion that it still has a decent pipeline of offshore deal opportunities." According to broker Credit Suisse, QBE's offer is greater than four times IAG's net tangible asset (NTA) value compared to recent QBE transactions at 1.5 to 1.75 times NTA. Analysts Arjan van Veen and Jumana Nahhas reckon QBE could offer up to $5.00 per IAG share while still generating earnings accretion for shareholders. But they noted that this would deviate from QBE's historical acquisition strategy and worry its shareholders. Consequently, they believe that a short-term takeover is unlikely, but they haven't ruled out QBE coming back to the table later on if valuations look more compelling. "In addition, we note overseas opportunities for QBE are plentiful, with global insurers trading at a substantial discount," its analysts said. Credit Suisse calculated IAG's 12-month forward price to earnings (PE) ratio to sit at 12.1 per cent. Allianz in Europe has a comparative PE of 6.9 per cent, Hartford in the United States 6.9 per cent and LG Insurance in Asia 6.7 per cent, to name a few. Merrill Lynch, meanwhile, believes QBE will come back with another bid and could offer up to $5.10 per IAG share and still make the deal cash earnings break-even. But given QBE's conservative approach, its analysts said they would be surprised if the insurer offered more than $4.50 to $4.80. "We think this level could be sufficient to satisfy IAG shareholders and would leave enough on the table for QBE to keep its shareholders happy," analysts Andrew Kearnan and Siddharth Parameswaran said. "Our fear is the IAG board and some of its executive team could continue to discount the extent of the issues that IAG faces and fight aggressively the QBE proposals." IAG shares rose 19 cents, or 4.53 per cent, to $4.38 on Wednesday while QBE added 30 cents to $23.20, giving its offer a value of $3.99 per IAG share.