From the market’s point of view there’s only one group of winners from the surprise move by Bank of Queensland on fellow regional bank, Bendigo Bank.
It’s the shareholders in the Victorian regional bank which has pioneered the community bank idea in this country to solid success.
Bendigo shares (BEN) finished $3.84 higher at $17.05 yesterday after rising as high as $17.50, a huge rise of $4.29 on its close last Friday of $13.21. Volume was a high 2.2 million shares.
In contrast the Bank of Queensland finished 1c lower at $16.59. The shares had a low for the day of $16.46, so the small recovery towards the end of trading should be seen positively. Turnover was light, just half a million shares.
So initial reactions put the deal firmly in favour of BEN shareholders and indicate some scepticism about the economics from the deal, as structured by the Bank of Qld.
It also raises the question what would happen if Bendigo Bank launched a counter offer.
The offer values Bendigo at $2.46 billion, compared to the market cap last Friday of just over $1.8 billion. The combined banks will have a value of around $4 billion.
BOQ will offer $5.50 cash and 0.748 of its shares for each Bendigo share. It will make a placement to help fund the purchase.
BOQ shares have risen faster than BEN’s over the past year and its price earning ratio of 17 times is higher than BEN’s 15, hence the use of shares in the bid.
But the outperformance is based on expectations, not actual earnings and its the franchise model of BOQ which is quite trendy these days among brokers and banking consultants. BOQ is based in faster growing Queensland.
In contrast BEN’s ultra regional, community bank system isn’t popular with analysts and consultants, hence the downgrading of its shares.
The mechanics of the deal are similar to the move by fellow Queensland financial services group, Suncorp, to buy insurer, Promina with a combination of paper and cash and a big issue to raise the cash component.
That was a much larger deal than this aggressive move out of Queensland.
At the close yesterday the offer valued BEN shares at $17.90, BEN shares closed 85c down on that, as investors await the reaction of the BEN board.
It has to be a friendly deal even though BOQ made the approach without any prior discussions.
A key sticking point will be the future of the community banking system that Bendigo has helped seed across the country in cities, towns and suburbs of major cities.
Even though it’s a generous price there’s no certainty the BEN board will say yes until it has some assurances. These will be given, but will they last?
The bid set the shares in Adelaide Bank (ADB) running higher. It closed at $13.68, up 68c on the day.
ADB was considered to be a bit more of an obvious target.
Even though its earnings came in at the higher end of reduced guidance for the first half of 2007, there are still niggling worries about its aggressive home mortgage and margin lending business. Those concerns have kept the shares well under previous highs in recent weeks.
One pricing anomaly emerged late yesterday for BEN shareholders. BEN put out a statement that the DRP price for the interim dividend that will be paid on March 30 will be $13.40.
Those Bendigo shareholders who elect to take shares instead of cash dividends will have a nice fat profit to add to their existing holdings.
Bendigo is a slightly bigger bank in terms of profit: earning around $100 million in 2006 to the $76 million earned by the Bank of Queensland.
That is a big difference in a deal of this size and even though BOQ says there’s $70 million of synergies, the effect of the bid. If successful, will see its shareholders owning 60 per cent of the bank and running the combined operation.
The combined bank will have a value of around $4 billion. BEN is valued at $2.4 billion or thereabouts, so BOQ is valued at $1.6 billion. So how come the smaller bank gets to wag the bigger one?
That’s not quite how it should go: the more profitable bank should be the dominant partner, or it is a ‘merger of equals’.
Ratings agency Fitch though sees no problems for Bank of Queensland
It affirmed its credit ratings on Bank of Queensland Ltd (BoQ), and says the ratings outlook is positive.
“BoQ’s ratings reflect its excellent asset quality, increased revenue diversification and a growing interstate presence in Australia,” Fitch said.
“They also recognise the bank’s relatively small size and reliance on the Queensland residential mortgage market.”
Fitch has a BBB long term issue default rating on BoQ and a short term rating of F2.
Analysts say the BOQ’s franchise branch business hasn’t been the big success some thought it would be. Some franchises have been closed and it has had trouble making headway in Sydney.
And Bendigo Bank has been losing share of deposits in the past year and the community banking system is a relatively high cost business compared to the bank’s own branches.
In an irony the offer was revealed only a day after Suncorp CEO, John Mulcahy went on national TV to tell the world that the next move for his company wouldn’t be in insurance, it would be in banks.
Not many left and most are all bigger and better run than SUN!
