Insurance Australia Group Ltd., the nation’s biggest car and home insurer, will buy Wesfarmers Ltd.’s insurance underwriting businesses in Australia and New Zealand for A$1.85 billion ($1.66 billion).
Wesfarmers will record a pretax profit of as much as A$750 million once the sale is completed, which will be included in the company’s results for the second half of the 2014 financial year, the Perth-based company said in a statement to the stock exchange. IAG will partly fund the purchase with a A$1.2 billion placement of shares to institutions at A$5.47 a security, it said in a regulatory filing.
IAG, founded in 1925, is seeking to grow its Australian and Asian operations after agreeing to sell its U.K. business last December. Wesfarmers, which owns coal mines, supermarkets, chemical producers and an investment bank, has been shifting spending to the Coles retail chain it bought in 2007 in Australia’s largest corporate takeover.
“The transaction is sensible for both companies; for IAG, it takes a strong competitor out and it can easily tap into the synergies,” said Angus Gluskie, chief investment officer at White Funds Management, which owns shares in Wesfarmers and IAG. “For Wesfarmers, it frees up the capital as it would have been very difficult to turn a dominant player.”
Accelerating Growth
Wesfarmers’ insurance underwriting businesses reported gross written premiums of more than A$1.6 billion in the financial year ending June 30 and employs more than 2,100 people, IAG said. The sale accord with IAG includes the underwriting operations for Coles Insurance, which will continue with Coles Supermarkets under an agreement that has 10 years remaining.
“Acquiring these businesses supports the group’s strategic priorities of accelerating profitable growth in Australia and sustaining our market-leading position in New Zealand, and we expect attractive earnings-per-share accretion,” IAG Managing Director Mike Wilkins said in the statement.
The sale doesn’t include the insurance division’s broking operations in Australia, New Zealand and the U.K. or its Australian and New Zealand premium funding businesses, Wesfarmers said.
Along with the institutional placement, IAG expects to raise A$200 million from a share purchase plan and A$300 million from a Tier 2 subordinated debt issue in early 2014, it said.
Approvals Needed
While the funds from the placement “would be used for a sensible acquisition, the size of a discount means it isn’t a massive opportunity for investors,” Gluskie said. UBS AG will underwrite the placement, IAG spokesman Andrew Tubb said in an e-mail.
Shares in IAG, which were suspended from trading this morning, have risen 22 percent this year and closed Dec. 13 at A$5.70. Wesfarmers shares were up 0.6 percent at A$41.56 at 11:40 a.m. in Sydney.
The acquisition needs to be approved by the Australian Prudential Regulation Authority, Australian Competition and Consumer Commission, Reserve Bank of New Zealand, New Zealand Commerce Commission and New Zealand Overseas Investment Office, Wesfarmers said. IAG said it expects to complete the transaction in the second quarter of 2014.
IAG also affirmed its guidance for an insurance margin of as much as 14.5 percent and gross written premium growth of a maximum 7 percent in the fiscal year through June 2014.
With assistance from Narayanan Somasundaram in Sydney.
Editors: Tomoko Yamazaki, Andreea Papuc