It had all the marks of an arranged marriage. Westpac Banking Corp., one of Australia’s Big Four banks, hired Gail Kelly, the successful head of the country’s largest regional lender, St. George Bank, to succeed long-standing CEO David Morgan. Barely three months after Kelly started her new job, Westpac last month launched a A$19 billion ($18.2 billion) stock-based bid for her former employer, the Australian banking industry’s most desirable takeover target.
Was the deal planned all along? Not at all, insists Westpac chairman Ted Evans. “We hadn’t given it a thought,” he told journalists after the merger announcement. Westpac, like its rivals, had long coveted the country’s No. 5 bank, he said, but St. George’s impressive performance under Kelly — earnings doubled over six years, to A$1.2 billion in the 12 months ended September 30, 2007, and return on equity rose to 23.2 percent from 16.6 percent — constantly put it out of reach. “We’ve always been interested in St. George, but we couldn’t afford it before,” Evans said.
What changed was the downside of Kelly’s aggressive growth strategy. She relied on wholesale markets for cheap funding, a strategy that helped St. George grow faster than its rivals and pushed its price-earnings ratio to a premium. But after Kelly left in August and the credit markets deteriorated, funding costs ballooned for the A-rated St. George to as much as 40 basis points over those of its double-A-rated rivals, compared with as little as 3 basis points previously. The bank’s share price, which peaked at A$38.50 in October, tumbled to A$21.50 in March, leaving it vulnerable to a takeover.
“You can’t stick with the same strategy” in the wake of the credit crunch, says Sean Fenton, a portfolio manager with Sydney-based Tribeca Investment Partners. “This will be a good test for Kelly to see whether she can adapt.” Stewart Oldfield, an analyst at Melbourne-based brokerage firm EC&L Baillieu, echoes the point. “Kelly is one of the country’s best retail bankers; that’s what her record says,” he points out. “The challenge for her is that Westpac is not just a retail bank, it is a large institutional bank.”
The merger, which would create the country’s largest bank by market capitalization, is not a done deal. St. George has coyly refused to agree to a A$100 million break fee requested by Westpac, leaving it free to consider better offers. National Australia Bank has already said it is considering a bid. The merger may also face regulatory and political hurdles. Australian politicians have rarely spoken in favor of bank mergers, and the newly elected government of Prime Minister Kevin Rudd is no exception. Evans, a former head of the Department of Treasury and Finance, was a gatekeeper of the Four Pillars policy that prohibits mergers among the four biggest banks and is well aware of the political sensitivities.
