St George's Wandering Eye

Giles Parkinson,
Business Spectator

26 May 2008

Westpac and St George have signed a merger implementation agreement, but the glaring lack of a break fee means that St George is well and truly open to any better offers.

The language used in the press statement is also interesting. Westpac chairman Ted Evans talks of “the merger” while St George chairman John Curtis refers several times only to the “proposed merger”.

And while St George has extended the period of “exclusivity”, it makes it clear that whatever this agreement entails, it does not prevent St.George from considering any superior proposals which may emerge.

The MIA includes a “no talk, no shop” agreement, but that does not preclude any unsolicited offers. St George notes that the agreement is subject to the St George board “continuing to hold the view that the proposed merger is in the best interests of St George shareholders”.

Right now, the market is betting quite firmly that one will emerge.

Westpac had sought a break fee of $100 million to cover the cost of its bevy of outside advisors – most notably Caliburn Partnership, legal firm Gilbert & Tobin and lobbyists Hawker Britton (which it estimates conservatively at $50 million) - and its internal teams, which CEO Gail Kelly said had amounted to 170 Westpac executives during the due diligence process of the past week.

But St George, advised by UBS, has once again said no.

Westpac has released some figures, including projected integrated and merger costs of $700 million. This includes transaction costs, IT costs, stamp duty and integration costs, but have not broken them down any further.

Westpac believes that it can generate pre-tax cost savings equivalent to 20-25 per cent of St George’s cost base, and expects those to be realised at the end of three years, while revenue attrition (i.e. unhappy customers going elsewhere) is expected to be limited to less than 5 per cent of St George's revenue, while future revenue growth remains the underlying appeal of the merger.