More Thoughts On WestGeorge

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            [3] => ((ANZ))
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            [1] => SGB
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This story features WESTPAC BANKING CORPORATION, and other companies.
For more info SHARE ANALYSIS: WBC
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

Of course it won’t be WestGeorge, or Saintpac, as the intention is to keep the two “iconic” brand names running in tandem. At least for the time being (that’s what Westpac said about Bank of Melbourne).

We reported bank analysts’ initial thoughts on the announcement of a Westpac ((WBC)) merger with St George ((SGB)) yesterday but since then analysts have been informed of the terms, specifically 1.3 Westpac shares for one St George.

The first reaction is that the bid is lower than the 30% control premium analysts expected. While this obviously ensures a better deal for Westpac, it does leave the door slightly open for another bidder to emerge. Speaking on the ABC, National ((NAB)) boss John Stewart found the concept “interesting”, but that’s about all he would say. The media sees this as an excuse not to rule out NAB, but analysts remain fairly sure Westpac is in the running by itself.

The next hurdle is thus the treasurer and regulatory bodies. In general, analysts suggest there will be a drawn out process of assessment which will probably result in a thumbs up, but that’s certainly not a given.

A drawn out process is not good news for St George holders, as the implication of the lowish bid, and the rapid acceptance of that bid by the St George board, is that St George is probably not in as good a shape as its glowing (?) FY08-09 guidance would suggest. This comes as no surprise. Citi suggests rapid acceptance suggests board concerns over St George’s relative funding, capital and payments markets positioning of its NSW bias were more than first thought.

Grizzly JP Morgan points out that the enthusiastic rhetoric coming from both camps is all about Westpac acquiring St George’s “strong” business model.  The fact that a model of high growth, broker-originated business, reliance on securitisation, and a high dividend payout doesn’t actually work anymore post credit crunch is by the by. But this does add weight to the rapid acceptance theory.

UBS calculates Westpac would need to achieve synergies of 17% of St George’s forecast operating cost base to justify the price it has offered. So to see earnings per share accretion in three years synergies need to be around 20%. Merrill Lynch is confident required synergies can be achieved, and thus sees it as a good buy for Westpac given it hasn’t paid away synergy value.

On the multiple brand intentions (ie keeping the Dragon as it is), UBS offers a warning of the example of ANZ Bank ((ANZ)) acquiring the National Bank of New Zealand. ANZ tried the same dual brand concept, but ultimately suffered from heightened market competition, an integrated back office trying to deal with two font line points of presence, and suffered a declining market share in mortgages. WestGeorge should end up with 25% of Australia’s mortgages, leaving room for downside.

Least keen on the whole idea is ABN Amro. Despite the lower than expected offer, ABN suggests it is still a full price for a deal that carries “significant” execution risk, especially in terms of maintaining revenue momentum. The analysts find lack of detail on expected synergies to be disappointing (although that’s meant to be revealed soon). Using Westpac’s stated expectation of a reduction to 40% in group cost to income, they calculate an offer price of $33.97 as break-even. That’s about what was offered.

In other words, Westpac is not retaining any synergy upside for its own shareholders, in ABN’s view. Nor do the analysts see Westpac achieving both capital and revenue upside in the merged entity. Capital is fine, but revenue upside will not be forthcoming while management is focused on integrating similarly sized businesses. Hence the analysts believe Westpac’s PE will contract back to sector average in the meantime (it was previously leading the field).

There have been no ratings up/downgrades on either bank this morning, and no target price moves of interest beyond adjusting for the bid. St George will now trade in lockstep with Westpac on the basis of 1.3:1 until such time as any developments occur. If there is no counterbid, we just have to wait out the regulators, and wait to see what the St George shareholders think about it all. An initial thought might be a thumbs up from institutions, but a not-so-sure from some retail investors, of which there are many. St George does supposedly have a loyal following from right back into its building society days.

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