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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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