Danny John July 31, 2009 - 5:32PM Global insurer QBE is to pay $315 million for the insurance arm of Elders as part of a wider restructuring and refinancing of the operations of the troubled rural services group. Elders shares soared.
The deal, flagged by BusinessDay this morning, will see QBE acquire the whole of Elders' insurance underwriting business and 75 per cent of its agency operation. Elder will continue to hold a 25 per cent stake in the agency company and take its interest back up to half before December 2012 as part of the transaction unveiled this morning.
Elders shares surged as much as 56 per cent and ended the day 10.5 cents, or 38.2 per cent, higher at 38 cents, while QBE shares dropped 27 cents to $19.50 after initially rising on news of the deal.
The two businesses are expected to generate around $500 million in gross underwritten premiums - revenue - in 2010 of which $400 million will be added to the top line of QBE's business. QBE needs to keep adding new insurance cover to its operations in order to fuel the growth it has witnessed over the past 15 years.
It has so far made more than 100 acquisitions as part of the move that has transformed it from a largely Australian commercial insurer to a worldwide insurer.
The Elders companies are anticipated to make net profit of $30 million in the next calendar year.
QBE stake
Today's announcement will also see QBE take a 12 per cent stake in the whole of Elders, paying 40 cents a share. The move will bring QBE's holding in Elders to 12.5 per cent.
QBE will take 112 million shares in the group and become in effect a cornerstone investor in a quasi-capital raising. It is part of a wide-ranging move to help shore up the company's balance sheet and release much needed capital. The share placement is expected to be finalised by the end of August under a heads of agreement signed today.
Elders said that the arrangement would significantly strengthen its debt-stressed balance sheet at the same time as underpinning the future of its insurance division.
''Today's announcement and the completion of the transaction in September represent a major advance in [our refinance and recapitalisation program] and the reduction of debt to desirable levels,'' said Elders chief executive Malcolm Jackman.
Since Mr Jackman, the former head of Coates Hire, was appointed last year, Elders has been in a desperate race to offload assets and keep its bankers at bay.
Last month it managed to get a three month extension to short-term debt facilities that were originally due to expire on June 30.
But the company, which has about $800 million of net debt, has been forced to pay an extra 300 basis points of interest - or 3 per cent - above the original cost of the loan.
The move would help Elders unlock up to $150 million of cash on its balance sheet which it is required to set aside by regulators to protect against insurance losses.
Trading halt
The company called a trading halt yesterday after its shares rose 3 cents, or 12.2 per cent, to 27.5 cents. Shares in Elders have lost more than 90 per cent of their value in the past two years, making it difficult to raise equity.
In May Elders warned it expected to post a loss of up to $15 million for the 12 months to June 30. At the time Mr Jackman blamed the ''double whammy'' of reduced demand and falling prices for the profit warning.
Elders recently sold a 10 per cent stake in Elders Rural Bank to co-owner Bendigo and Adelaide Bank for $33.9 million and divested its remaining 20 per cent interest in Australian Agricultural Company for $84.5 million. It is in talks with potential buyers of its Hi-Fert fertiliser supply division.
National Australia Bank has previously expressed interest in Elders's financial services business, although its appetite has cooled since Bendigo Bank moved to a 60 per cent stake in the banking arm.
Elders Rural Bank yesterday posted a 10 per cent lift in annual net profit to $45.1 million, boosted by lending growth and investment income.
With Jamie Freed, Eric Johnston and Scott Rochfort
(20min delay)