The proposed takeover of St George Bank by Westpac is looking more like a bargain for Westpac.
St George yesterday raised another $1 billion in funds to finance its 2009 funding and a banking merger in germany emphasised just how juicy St george really is.
There are mutterings in the market that Westpac might have to sweeten an already ‘sweet’ offer.A few more shares for the all paper offer, perhaps?
That’s emphasised by the song and dance made in Europe about the move by Commerzbank to buy Dresdner from German insurance giant, Allianz for around $US14.4 billion, or around $A16.8 billion.
It’s a deal that’s all about strategy and little about improving earnings. Staff and other cost cuts will be the order of the day for the next three to five years.
It is a big, defining moment in European banking, but it involves an employee and asset rich bank that lacks profits because of the poor returns and intense competition in Germany from small local and state-owned banks and savings groups.
But in fact the impending St George -Westpac is a far more strategic and better deal for all involved, with fewer staff and assets, but a superior profitability, and no exposure to subprime toxic mess.
Allianz is receiving a price of 9.8 billion euros in total (not quite but I will explain that) for an asset it paid 23.4 billion Euros back in 2001 and which has lost money off and on since (Its Dresdner Kleinwort investment bank is carrying around $3 billion in losses from subprime mortgage and other dodgy assets and Alliance will receive an investment company from Commerzbank worth 700 million Euros as part of the deal.
Allianz will be the major shareholder in the merged bank, with around 30% of the duo, which will be a lot better than 100% of a loss-maker or under-performer.
In fact the deal has every sign of being the once in a lifetime purchase: Commerzbank is being given every assistance by Allianz to buy the poorly performing Dresdner.
German investors looked at the deal and gave it a resounding no as they sold off Commerzbank shares by up tp 13% overnight.Allianz shares edged higher as investors made the right call that it got the better part of the deal.
Allianz’s shares have underperformed German and European market indices since buying Dresdner in 2001. Poor returns from insurance in the past year and the subprime mess and credit crunch have contributed, but it’s been the earnings draining Dresdner that has hurt Allianz’s reputation in the minds of investors.
Commerzbank will buy in two steps, initially acquiring 60.2% for cash and shares, and completing by the end of next year.
Commerzbank will transfer its Cominvest asset management unit, valued at about 700 million Euros, to Allianz which will in turn agree to cover as much as 975 million Euros of potential losses from assets held by Dresdner Kleinwort.
Up to 9,000 jobs could go, including 1,000 of those in London, at Dresdner Kleinwort which seems set up to take the brunt of the cost savings.Another 1500 jobs will go outside Germany as well.
The deal gives Commerzbank a total of 11 million German retail clients; more than Deutsche Bank with around 9.7 million, but the profits are poor.
Strangely, all the stories on the deal failed to mention the low profitability at Dresdner. Its latest earnings were estimated by the Financial Times at around 300 million Euros, or approaching half a billion dollars.All the talk is about cutting costs and synergies, little about earnings.
Commerzbank says it will get an earnings boost from the purchase from 2011: that’s a ‘charity’ deal and no bank or Australian group would be allowed to get away with such an earnings dilutive deal. It was one of the reasons Commerzbank’s shares fell.
The Westpac-St George is being done in a ratio of 1.31 WBC shares (worth just under $A31) for every St George share (worth yesterday around $30.40). That’s a value of $16.1 billion on a bank with probable 2009 earnings of well over $A1 billion.
Commerzbank had earnings of 1.9 billion Euros, making around 2.2 billion for the combined banks, or around $A3.7 billion on assets of 1.1 trillion Euros.
A combined Westpac/St George would have earnings of more than $4.5 billion on assets of around half that figure for Commerzbank.
We might have a banking oligopoly here but when it comes to creating value, it happens here.
The mooted Westpac-St George merger says a lot about which banking system is strong (and very profitable).
It’s also instructive for local investors still worried about bank bad debts in this country. We have concerns, German and other banks have problems (and the US and Switzerland are a disaster zone in comparison).
The big problem in Germany is the continuing strong influence of state and local governmen-owned banks which act un-commercially and which often have to be bailed out: there have been three bank bail outs so far in the credit crunch in Germany.
Two were state-owned banks, and a third was controlled by a state owned finance agency.
Another state-owned bank has also been bailed out but that is also related to trading losses not associated with the subprime mess, as well as subprime-related losses.
