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Westpac May Need Cash to Clinch St George Deal

Australia's Westpac Banking Corp may need to add cash to save its estimated A$14 billion ($13.6 billion) all-stock takeover of St George Bank as a sharp slide in Westpac shares
sparks unrest among the smaller bank's investors.

A branch of the Westpac Bank in Sydney, Thursday, Nov. 2, 2006. Westpac Banking Corp., Australia's fourth-biggest bank reported a record net profit of $3.071 billion (US$2,333.96 billion) for the 2005/06 year, up 13.8 per cent. (AP Photo/Mark Baker)
Mark Baker
A branch of the Westpac Bank in Sydney, Thursday, Nov. 2, 2006. Westpac Banking Corp., Australia's fourth-biggest bank reported a record net profit of $3.071 billion (US$2,333.96 billion) for the 2005/06 year, up 13.8 per cent. (AP Photo/Mark Baker)

The biggest banking takeover in Australia is still not a done deal though St George shares have continuously traded at a premium to Westpac's implied offer price, suggesting that investors
are hopeful it will raise its offer.

"There is a bit of talk about whether the deal has to be sweetened. They are probably going to have to consider whether they introduce a cash component," said Chris Halls, a fund manager with Argo Investments, which owns both Westpac and St George shares.

"The way prices are behaving, I just sense there may have to be an adjustment to be able to get it over the line," Halls said.

Shares in Westpac, Australia's fourth-biggest bank, have fallen 26 percent since the two lenders agreed to the deal in May to create Australia's second-biggest lender by assets behind National Australia Bank.

The deal was valued on May 13 at around $17.6 billion.

In contrast, the seven-stock Australian banking index is down 18 percent, while St George, the fifth-biggest bank, is down just 2.8 percent.

While the board of St George Bank has already agreed to the deal, shareholders will get to vote on it only in early November.

"St George shareholders would be happy to get a cash component in this sort of a market, something like 20 percent cash component and 80 percent equity," Halls added.

Some analysts say hedge fund selling has depressed Westpac shares and that would only intensify if Westpac were to alter the terms of the deal.

A banking source close to Westpac said there was no reason to alter the terms of the deal as credit markets have deteriorated further.

"If the bid was made today, it would have been at far lower price... so any contemplation of any change in the deal terms is absolutely not on the cards here," said the source, who declined to identified as he is not authorised to speak to the media. "Westpac would be mad to be thinking about topping up the offer in this environment," he added.

Last week, St George Chief Executive Paul Fegan told a local daily the bank was keeping its options open, and pointed to the sharp fall in Westpac shares since the deal was launched.

"There is plenty of time and options for the board, including myself, to reflect on the state of the proposal relative to the current trajectory of the bank and relative valuation," Fegan said.

"Our share price is trading ahead of the terms (of the offer), which is clearly a very big consideration." Westpac's offer of 1.31 shares for every St George share.

Fegan's comments could be early signs of brewing discontent within the St George board and further fall in Westpac shares could only stoke demand for some cash to be thrown into the deal, fund managers said.

"I don't yet get the sense of the deal falling apart, but if this continues some shareholders might agitate little bit more. The preference will be for a cash component," said Rohan Walsh, a fund manager with Karara Capital.

Walsh, who helps manage about A$1 billion, declined to say whether his fund held Westpac or St George shares.

Investors accepting an all-stock offer are exempt from capital tax gains, which is an important consideration for many.

Rival Bids

Analysts are sceptical about any rival bids emerging as Westpac Chief Executive Officer Gail Kelly enjoys a competitive advantage, having led St George for more than five years before moving over to Westpac.

They also rule out the possibility of a foreign bank launching an unsolicited bid due to lack of substantial synergies.

"Overseas banks could look at it now, I don't know they are strategically attractive enough as Australia is a modest growth country. There is not necessarily synergies to be gained," said Mark Nathan, a fund manager with Fortis Investment Partners, which manages about A$4 billion including Westpac shares.

He said Commonwealth Bank of Australia, the nation's second-biggest lender, was the next logical bidder. "But they would face more competition concerns than Westpac," Nathan said.

Australia's competition regulator is currently examining whether the proposed takeover would diminish competition and analysts say there is significant risk that the regulator may apply conditions to approve the deal.