St George and Westpac have announced the terms of their merger and it’s clear from the statements they both want it to happen.
They have agreed to a two week closed period while due diligence happens on each others accounts and during that time St George can’t encourage another offer.
Which is a pity because the only way a full priced offer for St George can happen is if there’s some sort of auction.
So, St George’s board and management should be forced to put the bank up for auction once the approval from the ACCC and the Federal Government, has been sought.
At least the St George board resisited the idea of a ‘break fee’ that Westpac wanted. That way the way is still open for a rival bidder to move.
I know Westpac approached St George, but the board of St George should now approach the ACCC and the Federal Treasurer seeking clearance to put itself up for auction.
That’s if anyone truly believes in competition and getting the best deal for shareholders.
Whether it’s the best thing for customers remains to be seen: over time you’d have to punt on the St George name and separate identity slowing disappearing as future Westpac managements try to cut costs and drive more revenue per customer.
St George shares hit a high yesterday of $34.20 and finished around $33.37, up a solid $6.72 or some 25%.
Westpac shares tumbled, shedding 3.3%, or 86C to close at $25.11, after hitting a day’s low of $25.
That weakness was due to investors realising that Westpac’s issued capital will rise, so existing holdings will be diluted a touch.
St George shares hit a pre-crunch peak of $38.50 and traded last Friday at $26.65.
The suggested value of the Westpac offer of 1.31 WBC shares for every St George share puts a value of $33.10, or around 11.4% under that all time high, which was only reached last December.
So in terms of recent price movements, the WBC offer isn’t generous: it’s just generous in terms of the price over the past month or so, which is a very opportunistic approach.
Now Westpac and some commentators are saying that St George needs the bid because its cost of funds will be too high.
But that assumes the securitisation markets remain shut.
Once they re-open, which they will, then St George will be able to generate funds, at a higher cost, but it can make cuts elsewhere to compensate and keep overall costs low. It’s what’s happening in other financial markets around the world at the moment!
Westpac, or another bank, will have to swoop now to grab St George for that very reason.
The big imponderable for all banks is the slide in housing that will mean greater pressure on earnings and costs than any funding costs dramas (which are being recovered anyway in higher mortgage and loan rates, something many commentators have missed).
All banks will be hurt by that, not just St George.
And finally some commentators, advisers and bankers see the Westpac move as blowing a hole in the Four Pillars banking policy.
I don’t think so. Taking over St George will ensure it remains set in concrete, to be only changed if a foreign bank raids or tries its hand.
Westpac’s opportunistic bid will have the perverse impact of freezing the level of competitors among the majors at four.
Don’t take my world for it: look at what Goldman Sachs JBWere wrote yesterday.
"Whilst a major merging with SGB is outside of the four pillars policy, we believe it could be likely that post the merger, the Treasurer would be more hesitant to bring down the four pillars policy as SGB currently provides competitive leverage in the market to ensure an appropriate level of pricing tension.
"At present SGB provides the government with a buffer of competitive leverage as the 5th main player in the market. This provides extra protection for the consumer from an outside competitor to the majors were the four pillars policy to fall and at a minimum of 2 majors merged (to create 3 majors + SGB).
"If SGB was to merge with a major and the policy was to fall, the competitive leverage in the market would be greatly diminished, with the main competitors remaining falling to 3 if not 2 major banks (from 4 or 3). As such, we believe a market place that goes from 5 main competitive to 4 main competitors, will provide further disincentive for the government to move on the four pillars policy."
The ACC last considered a bank merger back in 2000 with the Commonwealth buying Colonial. In giving approval the Commission said:
“When the Commission examined the Commonwealth/Colonial transaction, a particularly relevant structural factor was the existence of a strong regional bank in NSW competing against the four major national banks that would remain after the merger. Obviously, concentration in the various NSW financial services markets has increased and as a consequence the effectiveness of behavioural undertakings could be expected to diminish, other things being equal.”
The merger guidelines are changing later this year for a different way of looking at markets and share.
This merger probably will still be looked at under the old guidelines.
But in the end the final decision is Wayne Swan’s, and he also has a public interest test to apply to the deal.
That’s when he could insist that the merged banks cut all bank fees and charges to the level they were, say in 2005 and agree to freeze them for five years.
That would force other banks to trim their charges, and would put the acid on the merging banks to see how much they really wanted it.
All this means is that St George shareholders should insist the board puts the company up for sale to the highest bidder: ther
