BOQ Deal Is Not The Start
Now for a reality check in the wake of the Bank of Queensland’s surprise move on its regional rival, Bendigo Bank.
The $2.46 billion offer is not going to herald more rationalisation in the banking industry.
Far from it, it will be a one-off deal that some big banks will look upon with amusement as a small competitor tries to get bigger by neutering its target’s business model.
If anything the BOQ offer has the potential to seriously wound both banks, if it proceeds and the execution is handled badly.
Adelaide Bank, which rose again yesterday on expectations someone would bid for it, is not the equal of BOQ or BEN, even in terms of market appeal as a merger candidate.
Its business model, being heavily dependant on mortgages and margin lending, does not lend itself to being easily integrated with the business model or any other bank in the country.
BOQ is using its inflated price earnings multiple to try and snatch control of BEN which is bigger in terms of profits and number of branches.
The savings to justify the claimed $70 million in cost cuts, will come from eliminating one back office (BEN’s), cutting advertising, marketing plus other backroom and support costs (all BEN’s). That will mean job losses in Bendigo which won’t be a good look.
There will not be any cost savings from branch closures and sales: that would be commercial suicide in a transaction which is going to be regarded with deep suspicion among BEN employees, customers and shareholders.
How the BOQ could launch a bid like this offering a huge premium, without talking to BEN management and the board, is worrying for its eventual success.
It’s as though BOQ and its advisers were scared of the reception and tried to show their generosity up front before talking: that will only encourage BEN to ask for more.
$17.92 for BEN shares is a very rich price, but what’s the price for making it friendly as against hostile: aggressive and nasty battles don’t work for bank, customers, especially depositors who still have choice.
That price is a 30 per cent premium but why should the BEN board throw in the towel now? There are plenty of ways for a skilled target to delay or defeat the inevitable, or to extract a far better price.
Could a higher price for board approval eliminate the synergies sought by BOQ and make the deal a costly exercise in self aggrandizement?
It will take a short while before the heat goes out of the banking sector (not helping was the approach by Barclays to ABN Amro which could see as $US 200 billion megabank created)
Adelaide Bank is the most obvious candidate to watch but as said before, its product manufacturing, especially in margin lending, isn’t the sort of model on which to build a successful franchise.
Suncorp (SUN) is in the throes of completing the Promina takeover. That will occupy the management team for the best part of a year.
It has just sold a very large parcel of shares to finance the Promina purchase; shareholders would not like to be approached so quickly for a banking deal that might stretch management and the balance sheet even more.
SUN CEO, John Mulchay said on Sunday his company would be interested in expanding in banking: that’s likely to be a dream for sometime to come.
St George is too big a bite now for the Big Four to justify: it would be too expensive and the ACCC and the Federal Government might have something to say, especially as we are in an election year.
St George might be on the radar for a foreigner like Citi, HSBC and Bankwest and its UK parent, but probably not given the risk of investing billions of dollars here when there’s growth to be had in China, India and in Eastern Europe
Finally the BOQ might have to issue up to $600 million in shares to pay the cash component of its offer (that’s the difference roughly between the valuation of BEN before and after the bid).
That implies an increase of a third in the issued shares: that will need shareholder approval, unless some form quasi equity is involved.
The real winners may well be the Big Four plus St George. They don’t have to do a thing; they don’t have to waste money on bids or on working up alternate strategies.
The $4 billion combined BOQ/BEN would still be too small to worry the Big Four plus one and they might just get some new customers if the takeover is handled badly.
