Background<br />Australian Banking Industry Conditions in April 2008<br />Australian Banking Industryin April 2008<br />The onset of the global credit crisis in August 2007 has subsequently resulted to the following:<br /><ul><li>Increase in the cost of wholesale funding especially for non AA-rated banks
Deposits becoming an increasingly important source of funding</li></ul>Impact on St. George Bank<br /><ul><li>Being only an A rated bank, St. George is now experiencing significantly higher costs on 48% of their funding mix that is from wholesale capital markets
St. George’s share price has also fallen significantly since the onset of the global credit crisis</li></ul>St. George’s current vulnerability opens an unprecedented opportunity for Westpac to acquire St. George.<br />
The Question<br />Why should Westpac acquire St. George?<br />
Strategic Rationale: Be the Largest In Market Capitalisation<br />Market Capitalisation (in A$ billions)<br />Currently 3rd Largest<br />
Strategic Rationale: Be the Largest In Market Capitalisation<br />Market Capitalisation after Merging with SGB (in A$ billions)<br />59,026<br />
Strategic Rationale: Have the Largest Retail Branch Network<br />Highlights:<br /><ul><li>Largest retail network in Australia
Business Banking: Small/Medium Scale Enterprises</li></li></ul><li>Strategic Rationale: Growth Opportunities <br />Merged Westpac and St. George Business Model<br />Opportunities for Growth after merging with SCG:<br /><ul><li>Cross-selling to within the wider distribution channel in retail banking segment
Sensitivity Analysis<br />DDM Value (in A$)<br />20.15<br />
Benefits and Limitations<br />Dividend Discount Model (DDM)<br />Advantages:<br /><ul><li>Represent real cash flows to shareholders.
Considers time value of money.</li></ul>Difficulties:<br /><ul><li>Difficult to forecast key variables and assumptions.
Terminal value forms a substantial part of the present value of the firm and the present value of the firm is sensitive to a change in growth rate.</li></ul>Comparable Company and Precedent Transaction Based Valuations (Relative Valuation Approach)<br />Advantages:<br /><ul><li>Simple and easy to apply. At the same time, it also bears low cost (the absence of forecasting).
‘Market Value’ approach – based on recent M&A transaction.</li></ul>Difficulties:<br /><ul><li>Finding the right benchmark (company).
Benchmark may not be available (precedent transaction).
Finding the right multiple.</li></li></ul><li>Synergies<br />
Less aggressive approach ensures a higher chance to see the merger deal through
Hostile takeover is more expensive – offer a higher premium to make the deal happen</li></ul>Scheme of Arrangement<br />A friendly approach maximises the prospect of SGB’s and its shareholders’ support as SGB is able to negotiate terms of the merger:<br />a) Retaining SGB’s strong brand name <br /><ul><li> Cope with less resistance from SGB’s loyal customers (60% of SGB shareholders are SGB’s customers)
Reduces integration risks – compliments the risk minimisation of operational disruptions
Reduces levels of customer leakage</li></ul>b) SGB’s value-added strategies are retained <br /><ul><li> SGB continues to be customer-focused (maintains close-knit culture and competitive edge over rivals)</li></ul>c) SGB’s shareholders value not disadvantaged<br /><ul><li> Court approval offers some form of comfort to achieve a fair transaction
Bank value would not be destroyed </li></li></ul><li>Key Risks Considerations and Ratings<br />
GDP forecast<br />European Exchange Rate Crisis.<br />Asian Financial Crisis.<br />Global Financial Crisis.<br />Assumption: Lowest GDP could happen is -200% of 2007.<br />Assumption:<br />It follows 1995 and 1996 when the economy falls from the maximum.<br />Assumption: The movement from one year to another year is on a gradual basis to the maximum (120% of 2007) as the economy recovers.<br />