Your SlideShare is downloading. ×
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
St.George's Acquisition by Westpac Analysis
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

St.George's Acquisition by Westpac Analysis

2,901

Published on

HotK team's Analysis on the St.George Acquisition by Westpac. The time in the presentation was set at April 2008. The information is our view and does not necessarily reflect what would have happened …

HotK team's Analysis on the St.George Acquisition by Westpac. The time in the presentation was set at April 2008. The information is our view and does not necessarily reflect what would have happened after April 2008.

Published in: Economy & Finance
0 Comments
3 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
2,901
On Slideshare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
0
Comments
0
Likes
3
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide
  • Overpriced
  • Transcript

    • 1. HotK Team
      University of New South Wales
      3 May 2010
      Public Version
      The St.George transaction to WestpacWhy, How, and How Much
    • 2. Team
      Tai Tran (contact person)Master in Funds Managementwww.taitran.com
      Helen PhamMaster in Finance
      Oliver TokarMaster in International Business
      Collin TranMaster in Financial Analysis
    • 3. Agenda
      Strategic Analysis
      St.George Valuation
      Acquisition Strategy
    • 4. 1. Strategic Analysis
    • 5. Atmosphere
      Macro-economic
      Global financial crisis
      Cash rate increase, lower the spread of borrowing and lending
      Banking industry
      Competition: Big-4, Commonwealth Bank
      Global consolidation trend
      Negative effects of financial crisis
      Risks: Scarcity of wholesale funding, bad debt, funding costs
    • 6. Westpac
      Organic growth difficult due to economic condition
      Expects to develop retail
      Size premium for credit rating, cheaper funding cost
      Solution: acquisition!
    • 7. St.George
      Strengths, especially relevant to Westpac
      High quality customer service
      Segment of middle market
      Strong segments: retail
      Geography: ATM network across country, distribution network in South Australia, expansion to Western Australia
      Largest possible target in presence of four-pillar
      Weaknesses to exploit
      Credit risk with bad debts
      Strong finance position
      Key personnel: Gail Kelly, Peter Clare
    • 8. Synergy 1/2
      Growth
      Increase market share in NSW & tap the market of South Australia
      Market capitalisation: potential No. 1 in Australia
      Provide customers with greater convenience and wider product choice
      Market power
      Market share
      Product differentiation
      Bargaining power
    • 9. Market Share
    • 10. Synergy 2/2
      Capital market
      Size effect
      Easy access to funding for wholesale
      Economy of scale & scope
      Operating
      Revenue-enhancing: larger market share and lower funding
      Cost-reducing for back office, wholesale, distribution & ATM network, commercial, marketing. Historically 20-40%
    • 11. Westpac Shareholders Value
      Stock price of acquirer normally decreases several days prior to announcement
      Part of immediate gain is transferred to St.George shareholders in the form of acquisition premium
      Gain will be realised and will benefit Westpac shareholders once the merged firm becomes more efficient
    • 12. Risks
      Overpayment
      Dilution of control
      Unexpected loss of key personnel
      Differences in culture, IT systems, management systems
      Potential damage to Westpac brand image
      Changes in regulation
      Potential intervention to future business deals because of size
    • 13. 2. St.George Valuation
    • 14. Assumptions & Relevant Info
      Dividend is paid twice per year
      Required rate of return: 12.3%(based on the given beta and, risk-free rate of return and market premium)
      Dividend growth rate:
      Remain unchanged in 2008
      Increase slightly in 2009: 3%
      Increase fast in next two years: 10%
      Continue to increase with slower rate: 7%
      Increase with a constant rate of 5% from 2014
      Number of outstanding shares: 561,000,000
    • 15. Discounted Dividend Model
      Intrinsic Value
      Share Price $21.52
      Firm Value $12b
      Current Market Value
      Share Price $25.71
      Firm Value $14.4b
      Overvalued
    • 16. Midpoint
      12.56
      Sensitivity Analysis
      Cost of capital  0.25
      Dividend growth 2009  1%
      Dividend growth 2010-2011  2%
      Dividend growth 2012  2%
      Dividend growth terminal  1%
      Fair Price (b)
      Firm Value range: $9.82b to $18.04b
    • 17. Comparables Analysis
    • 18. Adjustments
      Adjustments
      Synergy benefits
      Premium for control
      Size premium
      Cost saving
      For Australian banking industry, cost savings is in the range of 20-40%, lower half for St. George
      Strategic partner premium
      Credit rating discount (Westpac AA, St.George A+)
      25% - 35% premium, based on intrinsic value
      Adjusted bid price $28.6, firm value $16.04b
    • 19. Estimated Synergy Value
      30% pre-tax operating cost reduction: $1.36b
      Funding cost-saving synergy: $200m
      Other synergy: $2b
      Total synergy value: $3.56b
    • 20. Limitations
      Assumptions
      Cost of capital on CAPM
      DDM model
      Too many assumptions on future dividends, dividend policy and growth rate
      Increase in retained profit lowers firm value
      Comparables
      Proxy firm
      Simplicity
      Accounts
    • 21. 3. Acquisition Strategy
    • 22. Payment Method Considerations
    • 23. Deal Financing
      Event of all-stock deal: issue shares
      Provisions estimate of $400m: from current cash balance exclude capital reserve ($1.9b)
      Westpac current D/E: 20.02, borrowing puts more financial distress. Avoid cash, avoid borrow
    • 24. Deal Structuring
      Stock for offer and cash for provision ($400m)
      Premium, restructuring cost, target debt ($178m), golden parachute, target bondholders
      Now to 10 May, gradually establish toehold: 2.5%, or approximately 350m
      10 May, present the proposal to St.George board of directors at open offer at $26 'fair price' plus 10% premium. Open offer $28.6, all stock
      In case of rejection
      Increase premium, golden parachute
      Mixed
      Consider hostile
      Timing: half-a-year
      Maximum premium 30% (Westpac precedent deals: 19%)
      Exit strategy: walk-away from the deal, keep strategic ownership of St.George
    • 25. Competition
      Possibility of auction
      Good timing for Westpac
      CBA: hurdle in getting approval from ACCC in acquiring St.George
      ANZ & NAB already ruled out major acquisitions after their previous M&A deals (ANZ bought Citizen Sec Bank 2007, NAB restructured 2005)
      CBA, ANZ, NAB will likely acquire other large targets in the long-run e.g. BankWest, Suncorp
    • 26. Post-merger considerations
      Combine back-office (technology, management systems, operations)
      Retain St.George customer service, culture, brand
      Dilution effect
      Change in financial structure; impact on financial targets, cost of capital of combined firm
    • 27. Summary
      Because of four-pillar, St.George is the best target
      Synergy: growth, market power, economy of scale and scope, bargain power on capital market
      Price $28 to $34
      Preferably friendly and all-stock
    • 28. Q & A
      HotK

    ×