Creating Nation's Biggest Bank Will Cost $700m

Sydney Morning Herald

Tuesday May 27, 2008

Danny John

THE $700 million price tag attached to the merger of Westpac and St George banks is expected to be met by stripping as much as a quarter of St George's cost base from the combined entity.

As the first sign of the savings expected from bringing the two organisations together emerged, the two companies yesterday formally agreed to pursue their plan to create a $66 billion bank.

Having undertaken detailed investigations of each other's finances under a two-week period of due diligence since Westpac first divulged its ambitions, the banks found no "hidden" problems that would derail a proposal that should see their joint business overtake the market leader, the Commonwealth Bank, to create the nation's biggest bank.

They also declared that the 1.31 for one share swap proposed by Westpac - which will result in St George shareholders owning 28 per cent of the merged bank - should proceed on the initial terms. The deal values St George at about $19 billion.

The move to issue new stock to St George shareholders is expected to dilute Westpac earnings per share for the next two financial years and begin paying back the all-scrip investment by 2011. From there on it is expected to be "strongly accretive" to the combined bank's earnings, according to documents made public yesterday.

The banks have signed a merger implementation agreement that suggests it will take almost six months to complete the deal. The two groups anticipate waiting until late August for approvals from the Australian Competition and Consumer Commission, the banking regulator, the Australian Prudential Regulation Authority, and the federal Treasurer, Wayne Swan.

St George shareholders will vote on the proposal at a scheme of arrangement meeting in the first week in November. Trading in the new Westpac is provisionally set to begin on November 24.

The $700 million bill for integrating operations reflects the transaction costs of making the deal happen, an undisclosed amount for restructuring various operations and the cost of extra technology to merge systems.

Westpac's chief, Gail Kelly, expects to recover much of the cost from reduced operational costs within the merged bank, which Westpac has put at 20 to 25 per cent of St George's existing cost base. Savings are expected to come from back office processing costs and efficiency gains.

An unspecified number of jobs are likely to go from the processing, product and support areas, but Westpac and St George indicated yesterday that the new organisation would do its best to ensure staff could be moved into operations that may well expand as a result of the merger.

Areas considered off limits from cuts are St George's 400-strong branch network and its corporate base in Kogarah. Westpac has committed to run St George as a stand-alone business under the Westpac umbrella.

St George shareholders were told yesterday they can expect a final dividend of no more than 74c under a payment-capping arrangement contained in the merger deal. The final dividend payment for Westpac investors has been capped at 97c a share.