Suncorp's bid fires up deal fever ::

Author: Stewart Oldfield
Date: 13/10/2006
Words: 874
Source: AFR
Publication: The Financial Review
Section: News
Page: 1

Suncorp has passed the first hurdle for its $7.8 billion bid for Promina, with the insurer's board stating it is favourably disposed to the unsolicited offer.

The move by Suncorp, unveiled formally yesterday, sparked speculation of another shake-out in the financial services industry.

Shares in Promina, Insurance Australia Group and Suncorp, which owns both banking and insurance operations, surged as investors anticipated that industry heavyweights Westpac Banking Corp and QBE would enter the fray.

Suncorp was forced to bring forward the announcement that it had offered Promina's board $1.80 in cash and 0.2618 Suncorp shares for each Promina share after a demand from the Australian Stock Exchange.

Promina's board said it was "favourably disposed" to the proposal, which will create the country's biggest general insurer with a market capitalisation of more than $20 billion.

The combined group will command a 26 per cent share of the personal insurance market in Australia, including a 40 per cent slice of the motor insurance market.

A binding merger agreement could be finalised as early as the middle of next week.

Suncorp said the deal would create a national insurance business with a strong platform for growth and create significant cost savings.

Promina managing director Mike Wilkins said the merged entity would be a strong competitor in the Australian market.

"We will be a very worthy competitor. We will just be painting on a larger canvas," he said, adding: "I have always recognised that there was a possibility that this would happen so you could not say it took me totally by surprise."

But big investors said the merger was by no means a done deal and they expected financial services companies to continue the rationalisation process already well under way in the resources and industrial sectors.

"Clearly in those markets people do look to consolidate. A number of people, us included, have always recognised that there are some strategic benefits for organisations such as Suncorp and Promina getting together, but there are a number of other organisations that could find similar strategic benefits," Mr Wilkins said.

"Who knows how it will all end up? It's all bull-market stuff," said Peter Morgan, a director of 452 Capital, which has large stakes in IAG and Promina.

Westpac declined to comment on rumours that it had appointed corporate advisers at Deutsche Bank to assist it on a possible merger and acquisition opportunities including Suncorp.

QBE chief executive Frank O'Halloran has said he is monitoring the performance of Promina and rival IAG with a view to a possible bid. Mr O'Halloran has also said he would be interested in taking a role in a break-up of Suncorp.

Shares in Promina surged 13 per cent to $7.30, still below the implied $7.61-a-share bid from Suncorp as investors speculated that Westpac could scupper the deal by launching a bid for Suncorp.

Westpac is believed to have approached Suncorp about a deal several months ago but was rebuffed.

Despite Suncorp's launching the biggest takeover bid in the financial-services sector in six years, which could include a capital raising, its shares rose as much as 5 per cent on speculation that Westpac was already buying shares in Queensland's biggest company.

Suncorp shares eventually finished the day down 10? to $22.20, while IAG rose 15? to $5.75. QBE shares fell 20? to $24.70.

"If they really want Suncorp, [Westpac] will have to move now. They cannot afford to let this transaction go through," Goldman Sachs JBWere told clients.

Promina executives were in an exultant mood yesterday.

Mr Wilkins said the company's unique strategy of managing a portfolio of differentiated insurance brands had driven its earnings growth over the past three years as a listed company. "That has meant we have created significant value for our shareholders in a relative short space in time."

The Queensland government heralded the possible creation of a $20 billion company headquartered in Brisbane."It is always good when a Queensland institution is broadening its base. This reflects well on Suncorp and also is another positive indicator for business in general in Queensland," Queensland Deputy Premier Anna Bligh said.

Promina shareholders also backed the bid.

"It's a great outcome for Promina shareholders," said John Sevior, head of equities at Perpetual Investments, which is the Sydney-based insurer's biggest shareholder with a 12.6 per cent stake. Perpetual is also a 5 per cent shareholder in Suncorp.

"The implied price is high against almost all historical comparisons, but not outrageously high," he said.

Some analysts said the deal would struggle to generate the $200 million in synergies necessary to make it earnings accretive.

Roger Montgomery, chairman of Clime Capital, said the deal did not create value for Suncorp shareholders. "In our industry, we seem to love activity; it is the fuel that feeds so much. But if activity is the motivation behind an acquisition, some stupid decisions can be made," he said.

The deal has yet to be scrutinised by the Australian Competition and Consumer Commission, which is likely to examine closely the market shares in personal insurance lines of the combined business, particularly in the Queensland compulsory third-party market and the NSW car-insurance market.

'We will obviously look at the proposal to see if it substantially lessens competition," an ACCC spokeswoman said.

Promina sources said they were not expecting QBE to launch a counterbid because it had already extracted a significant premium from Suncorp.

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