Bendigo Bank Is Holding Good Cards As Boq's $2.7 Billion Bid Plays Itself Out

The Age

Tuesday April 24, 2007

Stephen Bartholomeusz

BENDIGO Bank's formal response to Bank of Queensland's $2.7 billion bid is imminent. After a month during which Bendigo has been non-committal, there is an expectation the Victorian bank will reject the unsolicited offer.

There are two sets of reasons why Bendigo might reject the offer, one tactical and the other far more fundamental.

The tactical reason is obvious. Bank of Queensland didn't confer with Bendigo before tabling its offer and therefore the terms of the merger weren't agreed. Very few bidders put their best bid on the table without locking in a recommendation from the target, which suggests Bendigo might be able to extract more for its shareholders.

The fundamental reason is that, while Bank of Queensland's offer includes $5.50 a share of cash, the larger part of the consideration - $14 a share at Bank of Queensland's present share price - is in the form of scrip. Bendigo shareholders would end up owning just under half the merged entity.

That means the apparent value on offer when using today's Bank of Queensland share price as a guide is of less relevance for the Bendigo board and its shareholders than their view of the value of the merged entity. That in turn would flow from assessments of the value to be created, or lost, from combining the banks.

The Bank of Queensland move on Bendigo, which bordered on being hostile, raised eyebrows because bank mergers are always sensitive and Bendigo might be the most sensitive target in the sector.

Bendigo's loyal customer base and the community bank model it has developed means there is a significantly greater risk of a customer backlash, and consequent value destruction, than in most bank mergers. Given that the history of bank mergers in this market has been one of substantial customer and value leakage in the wake of takeovers, that places a major query over the logic and appeal of the bid.

The fact that it is Bank of Queensland - a similar-sized regional bank with high customer satisfaction and with an analogous model - might reduce the absolute level of risk, but the agitation among Bendigo's customer base and within its community banking business means the risk has to be taken seriously and assessed by the Bendigo board.

Against that, the merger approach has created a lot of value for both banks' shareholders. Bank of Queensland shares were trading below $17 before it unveiled its merger plan and now trade at almost $19. Bendigo's share price has rocketed from around $13.20 to $18.85, which represents an increase of nearly $800 million in its market capitalisation. That's a lot of value to turn its back on.

The market's response to the bid perhaps gives Bank of Queensland some scope to manoeuvre if, as expected, Bendigo does reject the offer. It could inject more value - perhaps a higher proportion of cash - into the offer to offset the risk without harming its own shareholders' interests.

It could equally seek to deal with the peculiar sensitivities within Bendigo's shareholder and customer bases by awarding a higher proportion of the merged entity to Bendigo shareholders and giving Bendigo's management a larger role in the affairs of the combined entity.

In concept, a friendly merger of the two small banks makes sense, given the complementary nature of the two networks and the potential to extract synergies, estimated at about $70 million a year, without customer-unsettling measures such as branch closures. There is minimal overlap between their distribution networks.

To succeed without risking substantial value destruction, however, a bank merger has to be friendly and recommended, and the peculiar nature of Bendigo's business and customer relationships makes those attributes more critical.

IT IS approaching a month since Alinta chose Babcock & Brown and Singapore Power's $7.4 billion offer over that of a seemingly higher bid from its former adviser, Macquarie Bank. Since then, Macquarie has been working feverishly on Alinta's criticisms of its offer to get back in the game.

The more time passes, however, the more difficult it will be for Macquarie to displace Babcock and Singapore Power.

Yesterday, small Sydney broker Tricom Equities notified the ASX that it now holds 5.22 per cent of Alinta, a holding that would have cost it close to $380 million. Tricom is generally regarded as having close links to Babcock, although Babcock has denied any involvement in the buying.

Babcock owns 3 per cent of Alinta and there are suggestions institutional investors in some of its funds - which will be the receptacles for Alinta assets bought by Babcock - are buying Alinta securities to ensure its plan isn't derailed by a new Macquarie bid.

Babcock's proposal will be executed via a scheme of arrangement, as would a revised Macquarie offer. Alinta has a big retail shareholder base, which makes it likely there will be a lower than normal turnout at any scheme meeting and therefore that a relatively modest block of shares might be able to block a scheme.

The bigger the block assembled by supporters of Babcock's scheme, the more difficult it would be for Macquarie to get its own scheme over the line, even if it was a demonstrably higher bid.

There isn't anything necessarily sinister about Babcock supporters manoeuvring to buttress its position. If investors in its infrastructure funds see substantial value being created through the acquisitions of Alinta assets, it would make sense to take action to secure those deals.

bartho@theage.com.au

© 2007 The Age

Back to News Index | Back to Home