St George Bank (SGB) Update

St George Bank (SGB) has a price target of $34.00 from sharemarket analyst Macquarie Research Equities.

St George Bank (SGB) What could the other banks pay?

WBC looks well positioned with SGB Board support:

Given the SGB Board's support for its 1.31 for 1 bid (subject to no superior proposals being made), WBC appears to be well positioned. As a result, we believe a counter-bid would need to be at least 5-10% higher than WBC's proposal in order to win the SGB Board's support. This leads to two key questions.

(1) What is the EPS impact of a 30% & 35% premium counter-bid?:

WBC's bid implied a 29% premium to SGB's pre-bid price. If we assume similar integration synergies from counter-bidders at higher prices (30% & 35% premium) it would be: 1.0% and 1.9% dilutive for CBA dilution by FY11E. For NAB it appears "do-able" with 2.9% and 3.9% dilution. For ANZ it would be 4.0% and 5.1% dilutive by FY11E. As a result, ANZ appears out of the race given its PE discount.

(2) What synergies would need to be extracted to make it accretive?:

Alternatively a more "aggressive" integration may be required to make it accretive. We estimate WBC would need around 21% net synergies (as percentage of SGB's cost base, net of revenue attrition) to make its current bid accretive. For CBA to make a 30% premium counter-bid accretive it would need 28% net synergies (35% at 35% bid premium), NAB would need 41% net synergies (49% at 35% bid premium), while ANZ would need 49% net synergies (56% at 35% bid premium).

Neutral (from Buy) - Price Target $34 in line with bid terms (from $30)

Given its higher PE of 11.7x CY09E, CBA appears the most viable counter-bidder. NAB could counter-bid but would need to convince SGB's Board of a more aggressive integration or offer a cash alternative. Our price target moves in line with bid terms and, given limited upside, we downgrade our rating to Neutral.