QBE issues new shares in a difficult market

The Australian insurance company raises A$406 million in an overnight placement to fund its US acquisitions. Shares trade lower Wednesday.
AustraliaÆs QBE Insurance Group launched a placement of new shares on Tuesday night raising a quick A$406 million ($315 million) from institutional investors. The deal, expected to price flat to TuesdayÆs close of A$33.62 due to the companyÆs strong following, ended up pricing at a 3.4% discount (or about 2% ex-dividend) with investors paying A$32.48 per share.

The company issued 12.5 million shares representing 1.5% of issued capital or about three-and-a-half dayÆs worth of trading. ôThis was a relatively small deal and should have been easy to place but nobody expected it would run into the troubles that were experienced on the global market on Tuesday,ö says a source familiar with the deal.

It is understood that the deal was covered by domestic institutions by the close of business Sydney time Tuesday but that the book was left open for Asian and European accounts to participate. The book grew only slightly in these last few hours as investors offshore dealt with the fallout from the market corrections.

The new shares are due to start trading on March 8, at which time investors will be hoping that the dip in the Australian market will be remembered as a short-term blip. QBEÆs shares closed at A$32.00 on Wednesday, down 1.6% and below the placement price. They had traded as low as A$31.00 during the day as the broader S&P/ASX200 lost 161 points or 2.7%.

UBS acted as sole lead manager and bookrunner on the deal, apparently fending off other banks that have a relationship with QBE including Credit Suisse, Merrill Lynch and Macquarie Bank. These three banks helped QBE with its last placement which was issued in September 2001 in the days after the terrorist attacks on the US. That time, just over A$660 million was raised at A$5.50 per share. ôObviously this latest deal was considered small enough not to need multi-handed trading,ö says a source.

According to one individual close to the deal, the placement was expected to price flat given that QBEÆs shares had rallied 5% in the three days prior to the issue. The stock surged following FridayÆs announcement of record profits for the year ending December 2006. The company, which is AustraliaÆs largest international general insurance and reinsurance group, recorded operating profits after tax of A$1.48 billion, an increase of 36% on 2005. Gross written premiums were up 10% to A$10.4 billion and net earned premiums were also up 10% to A$8.2 billion.

The record results allowed the company to increase its dividend payout by 39% to A$774 million û giving investors a final dividend of 55 cents per share or 95 cents per share for the whole year. However, investors in the new shares sold on Tuesday wonÆt participate in the 55 cent distribution given that QBE closes its books for the dividend on March 14.

QBE will use the proceeds from the placement to partly fund two US acquisitions: the $1.16 billion purchase of property and casualty insurer Winterthur announced in January; and the $800 million purchase of Praetorian Financial Group, a commercial insurer based in New York, which QBE bought last December.

The equity placement was flagged two months ago when QBE made the Winterthur announcement. The rest of the outlay for the two acquisitions will come from excess capital, short-term debt and a dividend reinvestment plan (DRP) which is also being arranged by UBS.

Under the plan, shareholders are given a week to choose whether to take cash or to reinvest their dividends in shares and then UBS underwrites the amount taken in cash, setting the price based on a six-day volume weighted average of the stock. The first dividend under the DRP is due to be paid on March 7. QBE is likely to receive up to A$450 million from the arrangement with UBS in March. The next two dividends û the interim 2007 and full-year 2007 distributions û are also covered by the DRP.

Unlike a lot of its Australian peers, QBE has followed an aggressive overseas expansion strategy with businesses in nearly every continent including Latin America and Asia. The Winterthur and Praetorian acquisitions are large compared to the companyÆs previous purchases. Most deals have been smaller bolt-on style purchases.

One such deal was done in Asia in June 2004 when it bought ZurichÆs portfolio of commercial policies in Singapore. The S$21 million deal added significant scale to QBEÆs business in the region, making Singapore its second largest market in Asia behind Hong Kong at the time.
¬ Haymarket Media Limited. All rights reserved.
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