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UBS 2010 Presentation


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My team emerged as the top 4 out of 61 other teams that registered for the UBS Investment Banking Challenge 2010.

I was the primary person responsible for the valuation portion.

These are the slides that my Team presented to UBS. See for more information.

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UBS 2010 Presentation

  1. 1. Westpac’s Potential Acquisition of St. George<br />
  2. 2. Agenda<br />
  3. 3. Our Team<br />
  4. 4. 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
  5. 5. Illiquidity in the securitisation market
  6. 6. 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
  7. 7. 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 />
  8. 8. The Question<br />Why should Westpac acquire St. George?<br />
  9. 9. Strategic Rationale: Be the Largest In Market Capitalisation<br />Market Capitalisation (in A$ billions)<br />Currently 3rd Largest<br />
  10. 10. Strategic Rationale: Be the Largest In Market Capitalisation<br />Market Capitalisation after Merging with SGB (in A$ billions)<br />59,026<br />
  11. 11. Strategic Rationale: Have the Largest Retail Branch Network<br />Highlights:<br /><ul><li>Largest retail network in Australia
  12. 12. Dominance in NSW
  13. 13. Instant extensive network in SA</li></ul>= 1,010<br />1,233<br />Merged Westpac and St George retail branch network<br />
  14. 14. Current Westpac Business Model<br />Strategic Rationale: Growth Opportunities <br />Current Opportunities for Growth:<br /><ul><li>Acquisitions
  15. 15. Expand in NZ with focus on Institutional Banking
  16. 16. Superannuation
  17. 17. 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
  18. 18. Extension of wealth management segment
  19. 19. Growth in small/medium scale business banking segment through St. George
  20. 20. Expansion in VIC, QLD, and WA using St. George’s brand</li></ul> Product & Operations<br />Technology<br />Core/Support<br />
  21. 21. Valuation and Offer Price<br />
  22. 22. Dividend Discount Model<br />
  23. 23. Sensitivity Analysis<br />DDM Value (in A$)<br />20.15<br />
  24. 24. Benefits and Limitations<br />Dividend Discount Model (DDM)<br />Advantages:<br /><ul><li>Represent real cash flows to shareholders.
  25. 25. Considers time value of money.</li></ul>Difficulties:<br /><ul><li>Difficult to forecast key variables and assumptions.
  26. 26. 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).
  27. 27. ‘Market Value’ approach – based on recent M&A transaction.</li></ul>Difficulties:<br /><ul><li>Finding the right benchmark (company).
  28. 28. Benchmark may not be available (precedent transaction).
  29. 29. Finding the right multiple.</li></li></ul><li>Synergies<br />
  30. 30. Valuation Summary<br />
  31. 31. Approach and Risk Considerations<br />
  32. 32. The Approach<br />Friendly approach<br /><ul><li>Reduces resistance from SGB ‘s directors and shareholders
  33. 33. Gail Kelly’s relationships with SGB and WBC
  34. 34. Less aggressive approach ensures a higher chance to see the merger deal through
  35. 35. 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)
  36. 36. Reduces integration risks – compliments the risk minimisation of operational disruptions
  37. 37. 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
  38. 38. Bank value would not be destroyed </li></li></ul><li>Key Risks Considerations and Ratings<br />
  39. 39. Key Risks Considerations<br />GREEN<br />
  40. 40. Key Risks Considerations<br />RED<br />
  41. 41. Key Risks Considerations<br />AMBER<br />
  42. 42. Key Risks Considerations<br />AMBER<br />
  43. 43. Final Recommendation<br />Buy 100% of SGB<br /><ul><li> Achieve the largest market capitalisation in Australia
  44. 44. SGB share prices are low now
  45. 45. To maintain competitive advantage, retain SGB branches and brand name</li></ul>Offer price and approach<br /><ul><li> Friendly scheme of arrangement
  46. 46. All-scrip transaction</li></li></ul><li>©2010<br />
  47. 47. 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 />
  48. 48. Relative Valuation Approach<br />