sweet merger in face of a global crisis...

Source: www.business.smh.com.au

Sweet merger in face of a global crisis
Malcolm Maiden [[email protected]]
September 30, 2008

Grant Samuel's veiled warning that St George shareholders would ignore Westpac's takeover offer at their peril, the debt extension Centro has won from its banks, the Benelux government rescue of Fortis and a continuing wash of central bank cash into the global system were all crisis control indicators yesterday.

While Congress works towards a $US700 billion emergency package that may or may not unfreeze the system the name of the game is control, not repair.

Sensible, conservative deals will advance, because the certainty they provide is preferable to the unknown: that is the implicit message behind the recommendation from independent experts Grant Samuel yesterday that St George shareholders vote for a merger with Westpac.

But the vast majority of deals are frozen. There were no company floats in the US market last week, for the seventh consecutive week, and two share issues worth a piddling $US215 million ($263 million) were outweighed by withdrawn issues worth $US367 million.

Banks looking for deals to recoup funds must, if they can, accept that fact, and bide their time, as Centro's banks have with their decision to give the property group another debt extension.

The extension was not so much given despite Centro's recent failure to close key deals, but because of those failures, and what they signalled: what Centro's chief executive officer, Glenn Rufrano, called yesterday paralysis in the property market - paralysis that inevitably will translate into further falls in property values.

The freeze does not bode well for Centro's chances of eventually digging itself out from under its debts, but demands from Centro's lenders for earlier repayment would close even the narrow alley that Centro is attempting to steer through.

The purge is now also surging into Europe, where Bradford & Bingley, a bank that specialised in investment housing loans, has become the second British bank to be rescued by the Government - Spanish bank Santander has been introduced to take over its deposits and branch network - and where Fortis of Belgium has been taken into stewardship by the governments of Belgium, The Netherlands and Luxembourg in an €11.2 billion ($19.7 billion) rescue.

Santander's acquisition of B&B's network qualifies as reconstruction strictly speaking, but is more accurately described as yet more stop-gap - as are the continuing massive central bank liquidity injections into the seized system. These include a net $2.75 billion from our Reserve Bank yesterday, 1.9 trillion yen from the Bank of Japan and, last night, $US30 billion from the European Central Bank through auctions that were a breakthrough for the ECB, but basically the kind of auction Australia's market-savvy Reserve Bank has been conducting daily for years.

These auctions are the signal that the promise of the $US700 billion US mortgage debt factoring package has not substantially eased the fear inside the machine. Interbank borrowing rates are now as high as they were when the crisis first threatened a complete meltdown, in January, and the central banks are in effect recycling cash deposited with them by banks which are simply too scared to lend to anyone else, even (and perhaps especially) other banks. We must wait and see whether the staged introduction of the funds themselves after the emergency bill clears Congress makes a difference.

In times like these Westpac's offer for St George, sweetened and locked earlier this month by the addition of a 28c a share dividend, is manna from heaven.

Grant Samuel values St George at between $30.62 and $35.02 including a control premium, and values the share exchange bid slightly below, at $30.13 to $33.40, based on a $23 to $25 Westpac share price (Westpac was down 83c, or 3.5 per cent yesterday as financials struggled again).

But it says that St George would trade below $25 absent a bid, and sums up the entire equation with this sentence: "The Westpac proposal provides risk mitigation for St George shareholders."

Given what has happened if the past fortnight, St George's extraction of the 28c a share sweetener will go down as a coup.

In May, Westpac offered a premium of between 24 per cent and 28 per cent over St George's then-market price, and since then the ASX 200 index has careered down 17 per cent, with the banks leading the way.

It was partly St George's good luck to have extracted a sweetener in the face of that, in that they sealed it before the really savage selling began. The result is a sure-thing merger that even at the sweeter price will entrench Westpac and the other Sydney-based bank, CBA, at the front of the local banking pack.


Ends.

Cheers, Pie :)