January 21, 2007 / 12:41 AM / 12 years ago

Australia regulator approves Suncorp-Promina merger

SYDNEY (Reuters) - Australia’s competition regulator cleared Suncorp-Metway Ltd.’s (SUN.AX) proposed A$7.36 billion ($5.8 billion) bid for rival Promina Group Ltd. PMN.AX to create the nation’s No. 2 car and home insurer, lifting both stocks.

Suncorp Metway CEO John Mulcahy during a news conference in Sydney in a file photo. Australia's competition regulator will not oppose Suncorp's planned $5.8 billion takeover of rival Promina Group to create the nation's second-biggest car and home insurer. REUTERS/David Gray

Some analysts had said the regulator may block the deal due to the increased concentration in motor vehicle insurance it would bring. The top three insurers — Insurance Australia Group Ltd. (IAG) (IAG.AX), the combined Suncorp-Promina group, and Germany’s Allianz (ALVG.DE) — would account for about 84 percent of the market.

“There were some doubts initially, but after the statements of issues, investors’ doubts were pretty much allayed,” J.P. Morgan analyst Shane Fitzgerald said.

The A$26.08 billion Australian insurance market is concentrated, with the top five companies controlling about 80 percent. Industry leader QBE Insurance Group Ltd. (QBE.AX), and IAG have been spreading overseas to overcome sluggish growth at home.

Shares in Suncorp jumped as much as 6 percent to A$20.98 in Wednesday trade, while Promina rose as much as 5.8 percent to

A$7.09.

By 0405 GMT, Suncorp was up 3.3 percent, and Promina had risen 4 percent. The benchmark S&P/ASX 200 Index was up 0.9 percent.

Despite Wednesday’s gains, Promina shares trade below the A$7.15 implied value based on Suncorp’s stock and cash offer, suggesting the market was not expecting a rival bid.

The Australian Competition and Consumer Commission (ACCC) said in a statement that it did not see significant competition issues.

ACCC Chairman Graeme Samuel said in the statement that existing competitors and the threat of new entry are likely to act as a strong competitive constraint on the merged firm.

“As a result, the ACCC does not consider that the acquisition will allow Suncorp to profitably raise premiums or diminish its level of service.”

SAVINGS

Suncorp has confirmed a pre-tax savings of A$225 million from the takeover last week, but cut its estimate on pre-tax integration costs by 10 percent to A$355 million.

Brisbane-based Suncorp is offering 0.2618 of its own shares plus A$1.80 in cash for each Promina shares, or around 17 times Promina’s forecast 2007 earnings.

The merged entity would have over eight million customers, an expected market value of A$20 billion and a proforma profit before tax of about A$2.19 billion.

The merger would also provide Suncorp an opportunity to leverage on Promina’s established general insurance and financial services brands such as AAMI, Vero.

Suncorp owns brands such as GIO and Just Car Insurance.

But analysts have argued that Suncorp has paid a full price for Promina acquisition.

“Overall, we are negative ... mainly due to the full price, the level of value transfer to Promina shareholders while retaining significant integration risk and the additional leverage to the domestic general insurance cycle,” ABN AMRO Equities said in report last week.

Suncorp expects the acquisition to be concluded in March 2007, and it plans to raise A$1.15 billion through an entitlement issue fully underwritten by Citigroup (C.N) to part-fund the buy.

Management consultants KPMG said in their annual survey of Australian insurers that the stiff competition in the domestic market is set to continue.

“The achievement of sustained, profitable top line growth represents one of the biggest challenges to the industry,” the report said, adding that insurers are exploring local and overseas acquisitions, alternative product differentiation and more aggressive market campaigns to overcome that challenge.

$1=A$1.28

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