Will NAB join the chase for St George?

The big news is that St George and Westpac have gone into a trading halt as they discuss a possible merger deal. Curiously, I was in a lift last week with Gail Kelly and she was smiling and chatting to her advisers so I probably should have eavesdropped more. Kelly is the new chief executive of Westpac and the former chief executive of St George Bank, so it makes sense that if Westpac is going to take someone over it would be St George.

St George, however, has been walloped in the credit crunch and its share price has fallen from $38 to about $26. At one stage it was down to about $21.40.

There are a few issues here of interest. First is the Four Pillars policy, which stops the Big Four banks – NAB, ANZ, Westpac and the Commonwealth – from merging, but of course it doesn’t stop mergers outside, and St George is the fifth-biggest bank.

Second, both Westpac and St George are predominantly New South Wales-based, so they probably will face competition concerns there. Although that doesn’t necessarily stop the merger going ahead, it may mean they have to divest branches or something like that. Third, it is clear that Westpac wants to take advantage of the fact that bank valuations in general have been hit hard.

I think we’re going to see this is as the beginning of the last round of consolidation in the Australian banking industry. I’ve said in the past that I think the Four Pillars policy will come under some review because it doesn’t really make sense. If there is no change the Bank of Queensland, Suncorp-Metway and Bendigo Bank will be among the final remaining targets for growth.

Bank of Queensland would certainly be a target, considering that Queensland is one of the faster-growing states; as would Suncorp-Metway, also based in Brisbane. Beyond that, there is the Bank of Western Australia, which is owned by HBOS, and there’s speculation that HBOS might be persuaded to sell, given its troubles in the UK market.

Together, Westpac and St George would have market capitalisation of $64 billion, putting the new entity ahead of the Commonwealth Bank at $58 billion and NAB at $53 billion. Having said that, I tend not to look at market cap so much, because share ratios are what matters more. Still, a merger would certainly create a banking giant that change the balance of power for the Four Pillars. Following that, we might indeed see some counter-bids for St George as other banks try to take that dominant role.

I would have thought NAB would certainly want to have a go, especially as St George’s weak profit growth has caused the share price to fall into line with the other banks. It would be difficult for the Commonwealth because it already has a dominant retail presence, and the likely competition issues that would involve. Then again, Westpac and St George both operate in the same Sydney-focused space, so competition is an issue for them too.

At the end of the day, this is a strategic takeover. It’s very difficult and very expensive for the banks to go out and get more customers in a mature market, because to get a customer you effectively have to win one from someone else. With the banks spending a lot of money on marketing to existing clients, that’s a difficult thing to do.

What’s more, Westpac is not a bank that has expanded overseas, like the NAB and ANZ, which have had varying degrees of success in their foreign expeditions. Considering NAB’s Homeside debacle in the US, it makes sense that Westpac is looking at home-grown St George, even if it has to pay a premium to get it.

Gail Kelly having run St George means the due diligence is more or less already done. This is a one-off chance to grab piles of assets, grab piles of customers and cut costs. We don’t know yet whether it’s hostile or friendly, and of course Paul Fagan – who replaced Kelly at St George only six months ago – will have something to say, so watch this space.

Fortescue Metals Group. There have been some rumours that a number of Chinese groups are looking at Fortescue. Now rumours are rumours and nothing is for certain, but indeed why wouldn’t Fortescue be of interest?

Chinese companies have already taken stakes in Midwest and in Rio Tinto, so Fortescue is a logical choice for those who are desperate for iron ore. Harbinger Capital Partners is apparently selling its 16% stake and if someone wants it enough, the sale won’t depress the share price.

Having said that, if a Chinese company wanted to take the entire stake it might require further approval. An option could be to buy the 10% and then sell the rest on-market. Meanwhile, it looks like Andrew Forrest, the Fortescue supremo, is about to replace the Packers at the top of the BRW Rich 200 table in a few days’ time – at current prices. On paper, Forrest is worth somewhere close to $9.5 billion.

Interest in Fortescue is peaking at the moment as the company gets ready to send off its first bulk carrier from WA, proving to a generation of doubting fund managers that the Fortescue project is a de facto iron ore major that has emerged in less than a decade. (Eureka Report's resources correspondent Tim Treadgold took the first picture of the first bulk carrier leaving Fortescue's facility in the Pilbara at the weekend. See below.)

Insurance Australia Group/QBE Insurance. Returning to a more concrete opportunity, but also in the rumour space, there is speculation that QBE might increase its offer for IAG. I have, however, said earlier that QBE is not the type of company to lift its bid, and that IAG is not exactly in a strong bargaining position. With IAG trading slightly below the offer price, there is only the vague possibility of a higher bid. In any case, I think if there is a higher bid, it’ll only be maybe 20¢.

IAG is in some ways a bit like St George. It has downgraded its profits while enduring a takeover battle and, further, the outlook for insurance has been a bit average recently. I think QBE will get IAG and I think the fact that the share price is not trading at a premium says that the market will probably let IAG be sold around this price.

Programmed Maintenance/Spotless Group. Another takeover that’s unlikely to see an increase in bid terms is that of the Spotless bid for Programmed Maintenance. Like IAG, Programmed has made the cardinal sin of announcing a poor profit estimate while defending a takeover. Although the sharemarket has been recovering across the board, and corporate earnings have been downgraded for many companies, there are perhaps no surprises here, but then again, Programmed has a couple of issues that are weakening its defence.

First and foremost, at least three of its major shareholders have said they’ll accept the Spotless bid; and, secondly, Programmed has of course cut its forward earnings estimate. Third, Programmed has criticised Spotless chairman Peter Smedley and that smacks of a desperate political campaign. It’s just posturing, nothing more and it all comes down to the price.

Programmed will probably argue for a small increase in the bid, but the fact remains that its stock is trading at a discount to the current offer so the market is saying that the chances of – or indeed, need for – an increase is not really there. I do think this bid will go ahead.

Australian Agricultural Company. An over-ambitious price seems to have been the undoing of Futuris’ attempt to sell its 43% in AACo. I’m surprised it couldn’t attract a bid, but then again there are two things here. First, credit is harder to get, so it makes sense Futuris couldn’t get the high price it wanted. Second, cattle are more expensive, with higher stock feed prices due to the commodities boom. Nevertheless, buying AACo would made good strategic sense for someone, so this is not likely to go away.

My understanding was that the Packer group was prepared to make a bid but just not at the price Futuris wanted. I think Futuris wanted $3.50 a share and Packer was only prepared to bid $3.30, but as you know, Packer doesn’t like to move on price.

Still, Futuris has told the market it wants to sell and I think ultimately the stake will be sold, but it could take time. AACo wants to stay as a separate company and may be asking for Futuris to break up its holding and sell to institutions, but Futuris would end up selling at a discount, so is likely to wait for another strategic buyer.

The guys at AACo may need to get used to the fact that the rest of their company might be bid for. I think within six months we’ll see this sold and – government takeover rules notwithstanding – the buyer is more likely to be a foreign player than a domestic one.

Dyno Nobel/Incitec Pivot. On the other side of soft commodities, the Dyno and Incitec deal still looks like it will definitely go through. So far, Dyno’s shareholders have done remarkably well out of it. The Dyno share price has been going up, obviously on the coat tails of Incitec, and it has only been trading at a 1.5% discount to the bid, which is tiny. You are now at the moment where buying Dyno or Incitec makes no difference; you’re essentially buying Incitec. It will go through.

Origin Energy/BG Group. Finally, last week’s other big story is still an interesting one. Origin had a strong rise in the last two days of last week. It went from $14 a share to $14.61 at one stage, basically because the Origin management started talking up the value of their gas assets.

What this means is, of course, that they’re probably not just going to roll over and accept this bid, they’re going to say that the company is worth more. I’m not so sure, however. The thing about their gas assets is that these are coal seam methane gas assets, which often don’t have much pressure so require lots and lots of wells – literally hundreds. Coal seam gas is more expensive to exploit on a large scale, but then again, with gas getting more expensive as oil goes up, Origin may have room to negotiate. I think they’re going to treat the BG Group bid as hostile and may try to negotiate a small increase.

There was mention in Eureka Report last week (see Letter of the Week) that Origin has an attractive solar division. Now while I’m a fan of solar energy – I have solar panels on my house – it’s not yet economically attractive. It makes people feel good but the reality is that unless electricity gets a lot more expensive, or unless there is a leap in technology, solar energy will remain a sideline. Origin may be performing R&D work, but so are many companies and it’s difficult to value technology in development.

On the other hand, while it’s dirty, at least Origin knows how to deal with coal. That’s where the real value lies – in the coal and in the coal seam gas.

Oh, and don’t forget Macarthur Coal. Coal companies are still quite popular and we may see some news on that front in the coming weeks.

Tom Elliott, a director of MM&E Capital, may have interests in any of the stocks mentioned.

nTakeover Action May 5-9, 2008
Date	Target	ASX	Bidder	(%)		Notes
08/05/08	Allegiance Mining	AGM	Zinifex	97.17
27/04/08	Chariot Ltd	CTI	TPG/SP Telemedia	70.25
11/03/08	Challenger Infrastructure Group	CIF	Consensus Business Group	0.00
25/03/08	Dolomatrix	DMX	Transpacific	22.70
09/05/08	Golden West Resources	GWR	Fairstar Resources	24.32		Extended to June 11.
07/05/08	Herald Resources	HER	PT Bumi Resources	19.79		Recommendation withdrawn in favour of PT Antam offer. Closing May 7.
06/05/08	Herald Resources	HER	PT Antam and Shenzhen	11.00		Recommended offer. Extended to June 5. FIRB approval received.
09/04/08	Jetset Travelworld	JET	Qantas	0.00		Potential 58%, subject to Jetset vote late May. Cleared by ACCC.
02/04/08	Just Group	JST	Premier Investments	23.67
19/03/08	Lion Selection	LST	Indophil Resources	0.00
31/03/08	Midwest Corporation	MIS	Sinosteel	19.89		Offer formalised.
01/04/08	Mineral Securities	MXX	CopperCo	0.00		Despatch of offer documents June 7.
24/04/08	Olympia Resources	OLY	Territory Resources	65.76
27/03/08	Programmed Maintenance	PRG	Spotless Group	13.20		Incl 10.3% pre-bid acceptances.
06/02/08	Rio Tinto	RIO	BHP Billiton	0.00		Offer formalised.
02/05/08	Tower	TWR	Guinness Peat Group	19.70		Seeks further 15.3% to reach 35%.
nScheme of Arrangement
18/05/08	Anzon Australia Ltd	AZA	Nexus Energy	53.10		Scheme terminated.
24/04/08	Arc Energy	ARQ	Australian Worldwide Exploration	0.00		Vote late July/early August.
29/04/08	Avonlea Minerals	AVZ	Sino Gas & Energy	0.00		No vote date set.
05/05/08	Bravura Solutions	BVA	Ironbridge Capital	0.00		No vote date set.
26/03/08	CBH Resources	CBH	Perilya	0.00		No vote date set.
07/05/08	China Education	CEH	Raffles Education	90.98		Shares suspended.
21/04/08	Dyno Nobel	DXL	Incitec Pivot	0.00		Vote May 22.
09/04/08	Ellendale Resources	ELL	Hawthorn Resources (prev Great Gold Mines)	0.00		Vote May 15.
23/04/08	Equigold	EQI	Lihir Gold	9.17		Vote May 30.
18/04/08	Great Artesian Oil & Gas	GOG	Drillsearch Energy	0.00		Vote early July.
02/05/08	Macquarie Private Capital	MPG	Bear Stearns Private Equity	0.00		Vote May 19. Receives FIRB approval.
02/04/08	Uranium King	UKL	Monaro Mining	0.00		Vote likely May 22.
09/05/08	Zinifex	ZFX	Oxiana	0.00		Vote June 16.
nBackdoor Listing
22/04/08	Global Approach	GLO	Teys	46.70		Vote May 22.
nForeshadowed Offers
05/03/08	Aquila Resources	AQA	AMCI	0.00		AMCI requested the register.
03/04/08	Atech Holdings	ATH	New major shareholders	32.54		Board seeking intentions of new shareholders.
10/12/07	Atlas Group	AHS	Unnamed parties	0.00		Investigations advance, but no offer yet.
05/11/07	Blue Energy	BUL	Sydney Gas	0.00		Discussions.
06/05/08	Hawk Resources	HFC	Unnamed party	0.00		Merger discussions.
16/04/08	Independent Practitioner Network	IPN	Sonic Healthcare	71.50		Proposed move to 100%.
06/05/08	Insurance Australia Group	IAG	QBE Insurance Group	0.00		IAG board response deadline extended to May 19.
05/05/08	Macarthur Coal	MCC	Unnamed third party	0.00		Discussions continue.
28/04/08	Mark Sensing	MPI	Unidentified party	0.00		Binding agreement being negotiated.
05/12/07	Mirvac Group	MGR	Lend Lease Corp	0.00		Talks confirmed.
01/04/08	Mount Gibson Iron	MGX	Shougang Concord	0.49		Takeovers Panel reverses 19.73% acquisition.
01/05/08	Murchison Metals	MMX	Sinosteel	0.00		Murchison denies takeover talks.
30/04/08	Origin Energy	ORG	BG Group	0.00		Takeover talks.
14/03/08	Trust Company	TRU	Equity Trustees	0.00		Talks confirmed.
01/05/08	Warehouse Group	WHS	Woolworths	0.00		Offer clearance stayed until 48 hours after appeal judgement.
01/05/08	Warehouse Group	WHS	Foodstuffs Co-operatives	0.00		Offer clearance stayed until 48 hours after appeal judgement.

Source: NewsBites