Westpac Banking Corporation (WBC) Company Stock Update

Submitted by Jim Thesiger on 14 May, 2008 - 00:52

Westpac Banking Corporation (WBC) has a price target of $26.00 from Australian stock analyst UBS.

Westpac Banking Corporation (WBC) and St George Bank (SGB) all-scrip merger talks

Event: WBC disclose merger discussions with SGB:

WBC has announced incomplete discussions for an all-scrip merger with SGB, a transaction that would create Australia's largest bank and funds administrator by market capitalisation and market share. No specific deal metrics were announced, however a commitment to "no net reduction in branch or ATM numbers", was provided. Any transaction will require ACCC and Federal Treasurer approval.

Impact: Price and board endorsement is critical (~65% retail register):

Deal timing reflects WBC's recent relative outperformance, trading at an 11% sector PE premium (vs. SGB's 3% discount FY09E) prior to today's sector-wide rally. WBC has not traded at a premium to SGB since July 1999. We estimate that 20% of SGB cost base savings, 1% revenue attrition (net $186m post-tax synergies) would broadly offset a 25% acquisition premium to last closing prices.

Action: Assuming all else equal WBC's "currency" appears strongest:

Acquirers may benefit from improved credit rating for SGB wholesale funding given current spread differentials and BIS II RWA reduction potential. However we believe that WBC may be advantaged relative to other Aust banks given (1) current sector premium rating (2) intimate knowledge of SGB via Gail Kelly/Peter Clare (3) proven execution skills (Kelly/Clare, plus WBC/BT) (4) capacity to manage attrition risk and brand challenges best.

Valuation: $26.00 Price Target (DCF, SOTP, Int'l Peers)

WBC is trading at 12.5x FY09E (last close 9th of May).

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