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St.George's Acquisition by Westpac Analysis


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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.

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St.George's Acquisition by Westpac Analysis

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