Insurance Australia Group (ASX: IAG) announced in late 2013 the acquisition of Wesfarmer's (ASX: WES) insurance underwriting business in Australia and New Zealand for $1.845 billion.
In order to fund the purchase, IAG will raise $1.4 billion through the placement of new shares. Of this, institutional investors have already been allocated and purchased $1.2 billion, leaving a tiny $200 million for retail investors.
The details of the share purchase plan (SPP) for retail investors were recently released by IAG. Here are the key facts and figures:
- The SPP proceeds will be capped at $200 million.
- Retail investors will be allowed to purchase up to $15,000 worth of ordinary shares each with no transaction costs.
- The price of the shares will be the lesser of $5.47 or a 2% discount to the five-day volume weighted average share price in the lead up to January 24, 2014.
- The SPP opens at 9am 6 January 2014 and closes at 5pm 24 January 2014.
- If the SPP is oversubscribed (more than $200 million in shares requested) a scale back will be performed where IAG holds discretion about how many shares each investor receives.
- In the case that an investor receives the full amount requested and the money sent to IAG is more than the cost of a whole number of shares the remainder will be donated to a charity.
Another case of disadvantaging retail investors
IAG's SPP follows that by Ansell (ASX: ANN) and Retail Food Group (ASX: RFG) which favoured institutional investors over retail investors. In the case of IAG, small shareholders account for nearly 36% of shares on offer, however are only offered 14% of the new shares on offer. An alternative would have been a 1-for-8 renounceable rights issue for existing shareholders which would have avoided diluting the share of smaller investors.
With the shares currently trading at around $5.77, a 5% premium to the institutional placement price, it's likely that $5.47 will remain the offer price.
At that price, each investor can receive up to 2,742 additional shares. Keeping in mind the 760,000 shareholders with less than 10,000 shares in the company (as at July 2013) and $200 million on offer, there is an average of 48 shares each if all investors participate in the offer. A massive scale back is likely to occur if even 50% of shareholders take up the full entitlement.
So should investors take up the offer?
The offer is at a 5% discount to the current price and allows existing investors to increase the size of their holding in IAG (in dollar terms) without paying additional brokerage. IAG had a fantastic 2013 as lower natural disasters resulted in huge profit margins.
The Wesfarmers' acquisition should cement IAG's position in a number of markets, especially motor vehicle in which Coles was threatening as a major competitor. In Australia, IAG commands a large, and now growing, market share and maintains pricing power over smaller peers.
IAG's 5.3% forecast dividend yield
All new shares will rank alongside existing shares and be eligible to receive the interim dividend in February (likely similar to last year's 11 cents per share). IAG have forecast a return to more normal margins in 2014, thus the 2013 full year dividend of 36 cents is unlikely to be repeated in 2014 (the final dividend of 25 cents was far above that previously).
Based on Commsec's estimates, IAG trades on a 2014 forecast dividend yield of a still decent 5.3%. Yield-hungry IAG shareholders will likely lap up the offer and hope for a catastrophe-free 2014.
