Insurance Australia Group, once rumoured as a takeover target for Wesfarmers, has put the shoe firmly on the other foot, buying out the insurance underwriting business of the Western Australian giant. The $1.85 billion sale is the largest in Wesfarmers’ history and appears to have plenty of positives for both sides, as long as the Australian Competition and Consumer Commission doesn’t stand in the way.
Elsewhere, the IPO market prepares for a big 2014, Pact Group gets set to list today, a major oil and gas merger gets canned and APA Group mulls a fresh offer for Envestra.
Wesfarmers, Insurance Australia Group
Wesfarmers has made its biggest ever divestment, offloading its insurance underwriting business to Insurance Australia Group for $1.85 billion. The deal, hatched after rumoured talks with Zurich Insurance Group broke down, sees IAG claim top spot in the intermediated insurance space across Australasia.
The Australian Competition and Consumer Commission lies in wait, but analysts largely expect the deal to clear. Still, it is not a fait accompli given IAG will gain significant strength in some markets, for instance motor insurance.
The deal will see Wesfarmers’ underwriting companies, which trade under the Lumley Insurance and WFI brands, head to IAG along with a 10-year distribution agreement with Coles Insurance.
It comes just two years after rumours surfaced that Wesfarmers was interested in buying out IAG.
The deal makes sense for both sides, with IAG gaining scale and the potential for significant synergies (The premium benefits of the Wesfarmers-IAG deal, December 16), while Wesfarmers has rid itself of a division that was no more than a bit part of the conglomerate at a time when valuations are quite high.
The deal was made at close to a 14 times price to earnings ratio and it’s hard to question Wesfarmers' decision to exit on those metrics. It had, however, just seen signs of traction with its strategy to use its extensive Coles retail network to sell insurance plans and the business did offer a growth avenue beyond retail.
Also, it was only August when the division’s managing director, Anthony Gianotti, made it clear there were no plans to sell any part of the Wesfarmers insurance business.
But after receiving unsolicited offers in the past couple of months and running a brief auction process, Wesfarmers quickly changed its tune.
Analysts will no doubt welcome the deal given persistent calls for the Western Australian-based group to focus more heavily on core assets, which include Coles and Bunnings.
The big question is where it will redirect the profit of over $700 million on the deal. Will it return some of it to shareholders or plough more money into its retail division, perhaps via an acquisition?
Meanwhile, IAG claims one of the rare valuable insurance assets available in the Australian market. With the dominant three of Suncorp Group, IAG and QBE Insurance, there are few bolt-on acquisitions of much worth in the market and the Wesfarmers asset, as the number five, was one of those unique opportunities.
It is consequently no surprise that Suncorp Group reportedly snuck a glance at the Wesfarmers' books before opting out of the sales process.
Suncorp knew that, despite the positives in the way of synergies and scale, buying an insurance business at a near 14 times earnings ratio was a significant risk – but it was one IAG was willing to take.
IAG will fund the deal largely through an underwritten institutional placement of $1.2 billion and a share purchase plan worth up to $200 million.
Wesfarmers gained half a per cent on the news, while IAG entered a trading halt pending its capital raising activities.
IPO market, Pact Group
The strong end to the year for the IPO market appears likely to continue into 2014, with as much as $8 billion worth of floats expected in the first half of next year.
“It’s very, very busy,” the equity capital markets co-head of a leading underwriter told Business Spectator’s DataRoom yesterday. “There are kick-off meetings on transactions that mean many of us are working right through the holidays.”
Among the possible listings is a return to the ASX for Spotless Group, which is currently owned by Pacific Equity Partners, as well as a bumper float of Healthscope, which is in the hands of Carlyle Group and TPG.
Taxi startup ingogo, the government’s Medibank Private business and the Australian mortgage insurance unit of Genworth Financial are among other floats in the works.
Around three-quarters of the action for the year in the IPO market has been seen in the final quarter, with the latest company to hit ASX boards being packaging group Pact Group, which will list today.
The Raphael Geminder-run group has raised $649 million in an oversubscribed bookbuild process and is the second last float of major significance left for the year. The final one will be travel insurer Cover-More, which will join the ASX next week.
Given a few signs of fatigue in the IPO market of late, the two floats will be closely watched.
At this point it appears little more than a blip in a boom, with much of the lacklustre response to recent listings likely due to market weakness (the ASX is down almost 5 per cent for the month) and a lack of quality.
In regard to the latter, the highest profile companies to have mixed responses, Dick Smith Holdings and Nine Entertainment, are both in sectors facing a structural downturn.
Senex Energy, AWE Limited
The rumoured takeover bid for AWE Limited from Senex Energy was forthcoming, but the target was not interested.
Senex lobbed a $752 million offer AWE’s way in pursuit of a deal that would have created the fourth largest oil & gas company in Australia. With a combined market value of $1.5 billion the deal was a significant one, but it is now destined for the scrapheap after Senex boss Ian Davies told AAP last night that his company would no longer pursue a takeover.
According to Davies, the offer put forward was a preliminary, friendly offer designed to get discussions rolling, but a decision from AWE to leak the information has riled him enough to walk away.
"They saw fit to make it public and leak it that way," he said.
It’s a bit unusual to shun a deal on those grounds alone, but it appears the right one. If you can’t trust the management of a company you are dealing with, then you have to be sceptical about whether it is worth chasing the deal.
The share price movements of Senex and AWE in response to the all-scrip offer didn’t help either, with AWE rising 7 per cent and Senex giving up 8 per cent.
APA Group, Envestra
The slowest moving takeover bid of the year, APA Group’s $1.3 billion offer for Envestra, may be finally moving forward. According to The Australian Financial Review, APA is ready to up its offer as early as this week, five months after it made its intentions known with an all-scrip proposal.
The report suggested tense relations between the two companies have improved and a revised offer may get the nod of the Envestra board of directors before Christmas.
Fort Street Advisor appears set to overcome competition for the right to run the sale of BrisConnections, according to the AFR. The report suggests the advisory firm will edge out the combination of Bank of America Merrill Lynch and Gresham Advisory Partners. The toll road, which is in the hands of receivers, is likely to be sold in the back half of 2014.
Finally, the cash-in-transit unit of Australian security group Chubb has been sold to Spanish-based Prosegur for around $150 million, the AFR reports. The deal was sealed by Chubb’s US-based owner United Technologies Corporation.