Westpac Banking Corp agreed to pay A$18.6 billion (US$17.6 billion) in shares for smaller rival St George Bank in a tie-up that will create Australia's largest bank by market value.
St George board executives plan to recommend the offer, which represents a 28.5 percent premium to Friday's closing share prices, Westpac said on Tuesday.
Westpac offered 1.31 of its own shares for every St George share, or A$33.10 a share based on St George's closing value of A$26.65 a share on Friday. The combined entity would have a market capitalization of A$66 billion, overtaking Commonwealth Bank of Australia's A$61 billion.
Westpac's new Chief Executive Gail Kelly joined the bank less than four months ago after heading up St George for nearly six years.
The offer comes just days after St George disappointed markets after it trimmed its earnings forecast due to higher funding costs caused by global credit market turmoil.
"Together, Westpac and St George would have a strong AA credit rating, a larger balance sheet and greater access to funding. This would position the combined business to withstand challenging funding markets and take advantage of opportunities created by the dislocation in capital markets," Westpac said in a statement.
Westpac said in a slide presentation that term funding for the merged entity in 2009 was expected to be "comfortably achieved at around A$35 billion."
The merged bank would be Australia's largest home lender with a market share of 25 percent, and the largest wealth management provider with funds under administration of A$108 billion.
Westpac said it planned to keep the St George brands and branch networks.
St George shareholders will own 28.1 percent of the combined entity and three St George directors will join the Westpac board, including Chairman John Curtis, who will become the Deputy Chairman of the merged group.
The merger is expected to be cash earnings per share accretive for St George shareholders from the first full year of the merger and within three years of the merger for Westpac shareholders.
The tie-up requires regulatory approvals. Westpac is being advised by Caliburn Partnership and St George by UBS.
Both banks' shares were put on a trading halt on Monday. St George shares closed on Friday at A$26.65, down 15 percent for the year, compared with a 7 percent decline for Westpac which closed at A$25.97.