Banks To Unveil Merger Details

Sydney Morning Herald

Monday May 26, 2008

Danny John

WESTPAC and St George are set to unveil the detailed terms governing their planned merger after a mad scramble by teams of accounting and legal specialists over the weekend to complete their forensic investigations into each other's finances.

With their two-week exclusivity negotiating clause due to expire early tomorrow morning, an announcement declaring that each bank is satisfied that there are "no nasty surprises" contained within their respective accounts could come as early as today.

In the meantime, the total value of the Westpac merger plan has dropped by about $6 billion since the deal was announced - from $66 billion to $60 billion.

Westpac's share price has being going backwards over that period and stood at $22.51 on Friday, $3.46 lower than it was two weeks ago today.

Based on the all-scrip terms of 1.31 Westpac shares for every St George share, that values the Dragon's stock at $29.48, compared with the initial bid price two weeks ago of $33.10.

St George ended last week at $32.32, nearly $3 higher and a 9 per cent premium to the merger offer. It is one of the biggest gaps in the stock prices since the deal was unveiled.

It is understood that the board of St George is due to meet this morning to review the progress of its team's due diligence work on Westpac's finances, and its merger partner's fellow directors are ready to do the same thing.

But the final merger implementation agreement still has to go through various legal and regulatory hoops that could delay formal notification to the Australian Securities Exchange for another day or two after both boards approve the document.

The work has been proceeding smoothly, but at a hard and fast rate, industry sources say. It has apparently not thrown up any significant hurdles to threaten Westpac's hopes of clearing the next key stage of a deal that was announced on May 13.

Neither bank has seen fit under the ASX's continuous disclosure rules to issue a statement to the exchange that their detailed investigations had uncovered any particular problem, especially on any need to increase provisions for bad corporate debts.

Most, if not all, of the information had already been disclosed by both banks when they released their respective half-year results within a week of each other - and just six days before the public revelations that they were in merger discussions.

However, with St George due to be released from the arrangements preventing it from talking to alternative bidders, Westpac will be watching any move by its bigger rival National Australia Bank, which has refused to rule out intervening in the proposed merger. The chief executive of NAB, John Stewart, has said his bank is monitoring the situation, especially given that the merger would result in a combined Westpac/St George leapfrogging its position as the No. 2 player in the banking league table.

The initial terms of merger would also result in the merged entity becoming the biggest bank in the country, overtaking the long-time leader Commonwealth Bank.

NAB is also concerned that by taking out the fifth largest bank, the position St George presently occupies, Westpac would also succeed in removing from the competitive game the last big regional bank of any size.

That would significantly reduce the rest of the Big Four's chances of growing their Australian businesses at any meaningful rate as they approach market saturation with a combined 80 per cent share.

However, NAB - a one-time large shareholder in St George in the early 2000s as it sought to stymie the ambitions of its rival ANZ - knows it would have to better Westpac's price terms that offered a premium of 28 per cent over the value of the smaller bank's stock early this month.

It would also have to match Westpac's commitment to largely preserve St George as a stand-alone business, not to close any of its 400 branches and maintain a corporate presence in Kogarah, where the Dragon is based.

NAB is thought to be waiting for the detail of this week's merger implementation agreement, in which Westpac is expected to give more information about the cost of the deal and the savings it hopes to make.

Those figures will help the Melbourne-based bank to assess whether it can make an offer for St George to stack up without diluting its own earnings as it eyes ways of expanding further into NSW, a traditionally weak geographical area for NAB.

© 2008 Sydney Morning Herald

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