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The Sydney Morning Herald

IAG thinks small for big purchase backers

Author: Anthony Hughes
Date: 24/10/2002
Words: 445
          Publication: Sydney Morning Herald
Section: Business
Page: 26
Insurance Australia Group shares made a much-needed rebound yesterday as the general insurer began convincing its 1.1 million small shareholders to help fund the $1.855 billion CGU/NZI purchase.

The purchase has been criticised by analysts, with Merrill Lynch yesterday calling the price paid 25 per cent above fair value.

Merrill's own IAG valuation is $2.85 a share (others are at $3 or more), well over the institutional placement price of $2.55 and yesterday's 6c higher close of $2.44.

With institutional demand covering only $500 million, despite hopes of $700 million, the insurer will rely on its small shareholders to raise at least another $380 million through a share purchase plan.

These are the same shareholders IAG has been keen to discard through share buybacks and a sale facility designed to reduce IAG's mammoth shareholder base following the 2000 demutualisation.

Small shareholders have a rare chance to buy shares at cheaper prices than institutions, because the price will be a 5 per cent discount to the 10-day trading average of the shares before the offer closes on November 21.

They can purchase $500 to $5000 of shares each, but will have to send in their cheques before knowing the final price.

Based on yesterday's close, they would pay as little as $2.32, well below the 12-month high of $3.57, but shares could lift in the month ahead as the plan is finalised.

The discount increases the attractiveness to small investors and reduces the likelihood that underwriters UBS Warburg and Deutsche Bank, who together collected an estimated $40 million for their advice on the purchase, will have to carry a shortfall. In any event, they are underwriting only up to $339 million of the $380 million asked for under the share purchase plan.

UBS was the biggest net buyer of shares on behalf of clients yesterday.

Assuming each investor contributed $2000 to $3000 under the plan, about 15 per cent or 180,000 IAG shareholders would need to participate. At the upper end of this average application, IAG would raise more than $500 million and is expected to accept these excess applications.

While the headline price paid was $1.855 billion, IAG also outlaid $70 million in transaction costs, and is strengthening reserves by $210 million and capitalising $60 million in integration costs.

Merrill's analysts said: ``IAG management stated that the competition was hamstrung at present and unable to (from either a capital or operational perspective) contend for these assets a one-horse race at top dollars. It is also arguably a buyer's market with the vendor [London-based Aviva] capital constrained."

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