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Takeover pressure mounts for IAG board

IAG is facing intense pressure to open talks with QBE over its proposed $7.6 billion takeover as the offer deadline looms.

QBE has given the IAG board until 5pm today to respond to its cash-and-scrip offer of 0.142 QBE shares and 70c for each IAG share. However, analysts say QBE CEO Frank O’Halloran’s strategy will probably be to extend the proposal even further.

Last Monday’s unfortunately timed IAG downgrade has undermined Chairman James Strong’s argument that the insurer remains a long-term value proposition for shareholders.

In a note to clients, Merrill Lynch recommended IAG “engage QBE and try and generate better terms”.

It also took a thinly veiled swipe at IAG’s beleaguered management team, calling for “accountability in IAG for the UK expansion”. IAG acquired UK motor broker Equity and underwriter Advantage in late 2006 for $350 million in the belief the market had bottomed out. But the soft cycle hasn’t eased.

IAG’s share price enjoyed an immediate spike when QBE made its offer public in mid-April as the market factored in a takeover premium.

But after lowering its insurance margin guidance for the full year ending June 30 to 6-8% from 9-11% last week, IAG also downgraded its estimate of gross written premium growth to 5.5-6.5% from 7-9%.

While IAG’s share price is now lagging, QBE’s has surged, closing at $25.54 on Friday. IAG’s share price closed at $4.34, only 1c ahead of the current value of the takeover offer.