A takeover battle for IAG is likely

This week saw Australian insurance giant QBE make an audacious yet ultimately abortive A$7.6bn (£3.6bn) bid for fellow antipodean insurance group IAG.

IAG had already rejected an earlier cash and shares bid worth A$7.09bn last week, prompting QBE to make the second higher offer, which was subsequently turned down by the IAG board on Monday.

QBE’s proposal was dismissed by the IAG board as being “totally inadequate” and seeking to take advantage of the company’s low share price – the offer was at a 1% premium on IAG’s closing share price on Friday.

There has been speculation for some time that a tie-up between the two was on the cards. IAG’s share price has taken a battering in recent months, and its bruised investors have been looking for some good news

With two knockbacks, will QBE make a third attempt, with a more generous offer?

It is curious that QBE went public on the takeover attempt. Despite insisting IAG keep the discussions confidential, it blew cover on Tuesday. IAG’s share price has since rocketed to $4.380, making QBE’s second offer (which represented $4.02 per IAG share) look decidedly limp. A revised offer would have to be at premium to this price.

QBE claimed it publicised the approach in order to address continued speculation - although there may be little gamesmanship on the part of QBE, with the publicity forcing IAG to justify its rejection of the bid.

Nonetheless, if QBE wants IAG it will need to make a serious offer. It certainly has the capacity to do so, and it sees clear benefits from a deal. According to QBE, the merger would generate A$300 million of synergies by 2010 and A$400 million from more efficient capital and risk management.

What makes the deal even more appealing is that while there are plenty of savings to be had behind the scenes, there are little direct overlaps. QBE is strong on the commercial insurance side, while IAG has personal lines strength.

The takeover battle may have only just begun.