Insurer QBE needs to sweeten bid to win over IAG

By Sonali Paul

MELBOURNE (Reuters) - Insurance Australia Group Ltd (IAG.AX: Quote, Profile, Research, Stock Buzz) has so far stonewalled a A$8.2 billion ($7.7 billion) bid from QBE Insurance (QBE.AX: Quote, Profile, Research, Stock Buzz), but a 5-10 percent sweetener could be enough to seal the deal.

With IAG's earnings sliding this year and its credit rating recently cut, the market sees little chance of another suitor trumping QBE, as it has the most to gain from putting the businesses together.

QBE has left its proposal for Australia's top home and car insurer open until Monday.

While it could extend the deadline further, launch a formal hostile bid, or walk away, investors are betting QBE will top up its offer slightly to try to secure a recommendation from IAG's board.

"IAG dealt itself a difficult hand by downgrading its profit," said Tom Elliott, managing director of hedge fund MM&E Capital. "At the same time, there's probably a fair chance they might be able to squeeze a small increase out of QBE, but I don't think it'd be anything substantial."

Analysts estimated QBE could afford to increase its offer by 5-10 percent and still justify a takeover, and that might be enough to secure an IAG board recommendation.

"Something that allows them to save face," said Elliott.

QBE shareholders said there is little incentive for QBE to significantly increase its bid, except to lure IAG's board back to the table.