IAG has confirmed it’s buying CGU and NZI for $1.86 billion, with the deal expected to be completed within a few days. Regulatory approval will take a little longer, and it’s expected the purchase will be completed by December.

CGU CEO Ian Balfe is happy with the deal, and so is the buyer, IAG CEO Michael Hawker, who met with CGU senior executives in Adelaide last night. Analysts are less impressed, claiming IAG has paid too much to the British-based parent, Aviva. It’s probably a little early too say, and the analysts are miffed that they failed to spot the deal until the Australian Financial Review broke the news.

“I don’t think it’s a bad acquisition, but I don’t believe they will be able to make back the cost of it,” JP Morgan analyst Shane Fitzgerald said. “It’s not like the acquisition will see their share price jump immediately by 10% or 15%.”

In a statement last Thursday, Aviva confirmed market speculation that IAG is holding discussions with it regarding the acquisition of the Australian business and New Zealand general insurance businesses.

It said the acquisition would be “a logical step in IAG’s strategy to diversify by product, distribution channel and geography”. Then on Friday IAG released a statement to the ASX indicating it will fund the acquisition through a share issue.

The ASX statement said IAG plans to raise a minimum of $500 million from an institutional share placement at $2.55 per share to part-fund the acquisition.

The acquisition means IAG will come to dominate the insurance market, especially as its major competitor Suncorp is believed to be having a few problems making the GIO merger work.

The proposed acquisition will help Mr Hawker’s stated intention to double IAG’s premium revenue over the next five years. IAG and CGU combined could have gross written premiums of almost $5.5 billion a year.

He said that IAG would be hit with the usual integration risks involved with mergers. “In any acquisition there is always the risk that things won’t happen the way they expect them to.”

Brokers have voiced concerns at the merger, although Mr Balfe has been at pains to reassure them that little will change and their relationship with brokers will not be affected. Mr Hawker will have an opportunity to discuss the matter at the NIBA Convention today, when he takes part in a panel discussion.

Despite his hesitation about the short-term gains for IAG, Mr Fitzgerald said the diversification benefits in gaining access to CGU’s broker-based distribution networks will broaden IAG’s product mix into commercial insurance and diversify its distribution channels into broker networks.