QBE purchase of Beazley an investor quandary

QBE chairman Michael Wilkins and CEO Andrew Horton. Picture: John Feder

Plenty of bankers hope that QBE will buy Beazley Insurance.

It makes sense on one level because it is big on cyber security, which would be valuable to QBE. And current boss Andrew Horton knows the business well, given he used to run it.

But the question many in the market are asking is why make a major acquisition now when everything is going well for QBE?

While there’s an outside chance that the $28bn Aussie insurer vies for the business, most believe that, on the balance of probability, it’s unlikely to happen.

Mergers and acquisitions are hard to get right at the best of times, and for insurers the track record has not been a good one when it comes to offshore acquisitions.

Both QBE and rival IAG have had to lick their wounds after buying businesses offshore and retreating to the local market when they haven’t gone well.

Perhaps this management team thinks it won’t fall into the same traps others have in the past, but most doubt it.

It’s not to stop investment bankers from trying to convince the company, but looking at Ebos, Treasury Wine and Orora M&A deals planned last year, none were well received and Ebos abandoned the deal as a result.

Sources that know the company well think Mr Horton and the QBE board will not want to do anything to jeopardise the way the market is currently rewarding the stock.

It has started paying a dividend and some analysts have even suggested it may be overpriced.

Yet if the stock is overpriced, maybe that’s why a deal could be justified.

Beazley is worth £4.6bn ($9bn) so it would be no small deal and would require an equity raising by QBE.

It could put its expensive scrip to good use.

An argument in favour of the deal is that QBE, which counts Goldman Sachs as its adviser, has the balance sheet to do it and it’s not going to grow organically.

And it has successful businesses offshore, such as its established US operations which are making money.

But at the same time, market experts say Beazley is trading at full value.