ubs 2010 presentation
DESCRIPTION
My team emerged as the top 4 out of 61 other teams that registered for the UBS Investment Banking Challenge 2010.I was the primary person responsible for the valuation portion.These are the slides that my Team presented to UBS. See http://www.ubs.com/1/e/graduates/challenge/about.html for more information.TRANSCRIPT
TDT
The Dream Team
WESTPAC’S POTENTIAL ACQUISITION OF ST. GEORGE
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
AGENDA
Our team
Background
Strategic rationale
Valuation
Offer price
The approach
Risk Considerations
Final recommendation
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
OUR TEAM
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
BACKGROUNDAustralian Banking Industry Conditions in April 2008
The onset of the global credit crisis in August 2007 has subsequently resulted to the following:• Increase in the cost of wholesale funding
especially for non AA-rated banks• Illiquidity in the securitisation market• Deposits becoming an increasingly important
source of funding
Impact on St. George Bank• Being only an A rated bank, St. George is now
experiencing significantly higher costs on 48% of their funding mix that is from wholesale capital markets
• St. George’s share price has also fallen significantly since the onset of the global credit crisis
Australian Banking Industry in April 2008
St. George’s current vulnerability opens an unprecedented opportunity for Westpac to acquire St. George.
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
THE QUESTION
Why should Westpac acquire St. George?
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
55,020
49,266
44,603 43,231
14,423
STRATEGIC RATIONALE: BE THE LARGEST IN MARKET CAPITALISATIONMarket Capitalisation (in A$ billions)
Currently 3rd Largest
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
44,603
55,02049,266
43,231
14423
Largest after acquiring all of SGB59,026
STRATEGIC RATIONALE: BE THE LARGEST IN MARKET CAPITALISATIONMarket Capitalisation after Merging with SGB (in A$ billions)
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
STRATEGIC RATIONALE: HAVE THE LARGEST RETAIL BRANCH NETWORK
13
192
504
113
160
229
22
1,233
Merged Westpac and St George retail branch network
= 1,010
Highlights:• Largest retail network
in Australia• Dominance in NSW• Instant extensive
network in SA
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
Current Westpac Business Model
STRATEGIC RATIONALE: GROWTH OPPORTUNITIES
Current Opportunities for Growth:• Acquisitions• Expand in NZ with focus on Institutional Banking• Superannuation• Business Banking: Small/Medium Scale Enterprises
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
STRATEGIC RATIONALE: GROWTH OPPORTUNITIES
Merged Westpac and St. George Business Model
Product & Operations
Technology
Core/Support
Opportunities for Growth after merging with SCG:• Cross-selling to within the wider distribution channel in retail banking segment• Extension of wealth management segment• Growth in small/medium scale business banking segment through St. George• Expansion in VIC, QLD, and WA using St. George’s brand
VALUATION AND OFFER PRICE
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
DIVIDEND DISCOUNT MODEL
Total value for the bank: 0 1 2 3 4 5 6 7 8 9 10 11
(A$m) 2007A 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F
Net Income 1,190 1,144 1,191 1,243 1,301 1,345 1,382 1,434 1,501 1,565 1,605 1,666
Growth (%) -3.90 4.13 4.37 4.68 3.37 2.76 3.79 4.68 4.26 2.56 3.78
Risk Weighted Assets 63,226 60,760 63,272 66,036 69,126 71,455 73,430 76,209 79,776 83,174 85,299 88,525
Target Tier 1 6.70% 6.44% 6.70% 7.00% 7.33% 7.57% 7.78% 8.08% 8.45% 8.81% 9.04% 9.38%
Increased in required capital (159) 168 193 226 176 154 224 302 299 192 303
Free cash flow to equity 1,302 1,022 1,049 1,075 1,169 1,228 1,210 1,200 1,266 1,413 1,364
PV of terminal value 4,192 PV of cash flows 1,160 811 741 676 654 612 537 474 446 443 381Total PV of equity 11,127
Total number of shares on issue 552,231,572Value per share 20.15
Assumptions Cost of equity (%) 12.30%Growth rate (%) 3.13%Terminal growth rate (%) 2.95%Implied 2010 P/E (x) 9.59Tier 1 target (%) 7.87%Payout ratio (%) 100.00%
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
SENSITIVITY ANALYSIS
DDM Value (in A$)
Interest Exp
ense (-/
+ 5%)
Interest Inco
me (-/+ 5%)
Other In
come (-/
+ 5%)
Growth
Rate (-/
+ 5%)
Terminal
Growth
Rate (-/
+ 5%)
Bad Debts
Expense
(-/+ 5%)
Operating E
xpense
s (-/+
5%)
Income Tax
(-/+ 5%)
Target T
ier 1 (-/
+ 1%)14
16
18
20
22
24
26
20.15
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
BENEFITS AND LIMITATIONS
Dividend Discount Model (DDM)Advantages:•Represent real cash flows to shareholders.•Considers time value of money.
Difficulties:•Difficult to forecast key variables and assumptions.•Terminal value forms a substantial part of the present value of the firm and the present value of the firm is sensitive to a change in growth rate.
Comparable Company and Precedent Transaction Based Valuations (Relative Valuation Approach)
Advantages:•Simple and easy to apply. At the same time, it also bears low cost (the absence of forecasting).•‘Market Value’ approach – based on recent M&A transaction.
Difficulties:•Finding the right benchmark (company).•Benchmark may not be available (precedent transaction).•Finding the right multiple.
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
SYNERGIES
Merger costs and synergy benefits Amount ($ millions)
Assumptions
1 Cost synergies 348 25% of operating expenses. (Empirical evidence of 20-30%).
2 Restructuring costs (562) 161.5% of cost synergies .(Average of precedent transactions).
3 SGB's Funding benefits 51 48% of Deposits and other borrowings at 15 bp (May 2007).
4 Revenue synergies 232 25% of SGB revenue $2.3 billion realised over 10 years.
Total benefit 69
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
VALUATION SUMMARY
WBC offers Starting price Maximum price
Price per SGB share $30.85 $33.69
Total consideration $17.04billion $18.60billion
Exchange ratio (WBC : SGB) 1.3 : 1 1.42 : 1
EPS Impact (Current : 1.85) 1.81 1.77
Value of SGB $/Share
Dividend Discount Model 20.15
Comparable company 25.77
Precedent transaction based 27.70
Value after considering synergies 33.69
SGB's current trading value 25.71
APPROACH AND RISK CONSIDERATIONS
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
THE APPROACH
•Reduces resistance from SGB ‘s directors and shareholders•Gail Kelly’s relationships with SGB and WBC•Less aggressive approach ensures a higher chance to see the merger deal through•Hostile takeover is more expensive – offer a higher premium to make the deal happen
Friendly approach
A friendly approach maximises the prospect of SGB’s and its shareholders’ support as SGB is able to negotiate terms of the merger:
a) Retaining SGB’s strong brand name • Cope with less resistance from SGB’s loyal customers (60% of SGB shareholders are SGB’s customers)• Reduces integration risks – compliments the risk minimisation of operational disruptions• Reduces levels of customer leakage
b) SGB’s value-added strategies are retained • SGB continues to be customer-focused (maintains close-knit culture and competitive edge over rivals)
c) SGB’s shareholders value not disadvantaged• Court approval offers some form of comfort to achieve a fair transaction• Bank value would not be destroyed
Scheme of Arrangement
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
KEY RISKS CONSIDERATIONS AND RATINGS
•Potential for unfavourable or noticeable negative impact on merger transaction
•Management attention is required to manage risk of unfavourable outcomes
RED
•Potential for less-than-optimal impact on merger transaction
•Management needs to establish monitoring controls/actions to manage potential risks
AMBER
•Potential minor impact on the merger transaction
•Management only needs to act if new unfavourable events occur
GREEN
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
KEY RISKS CONSIDERATIONSKey Risks Description
Possible interlopers in the merger bid
Other Big Four banks in Australia – CBA, NAB and ANZ – may counter-bid WBC’s offer to acquire SGB. This could result in WBC having to offer a much higher price to ensure the success of the bid. However:
Risk level:
CBA facing domestic competition issues
NAB planning to expand into overseas markets as well as investment banking sector
ANZ focusing on expansion into Asia
GREEN
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
KEY RISKS CONSIDERATIONSKey Risks DescriptionGovernment approval on the merger
Issues:Possibility of monopoly subsequent to the mergera) ACCC (the Government) may view each Australian state as a
separate banking market – NSW is the main issueb) WBC and SGB, combined, will be the largest amongst all the
Big Four Banks in Australiac) The merger would lessen competition in the wealth
management sector – possibility of reduced product diversity for consumers
The state of Australian banking industry “Four Pillars” policy maintained Solution:Obtain government approval for the merger proposition at the soonest time possible and manage potential legal issues earlyRisk level:
RED
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
KEY RISKS CONSIDERATIONSKey Risks DescriptionSGB reliance on wholesale funding and exposure to interest rate risk
Issues:a) Wholesale credit markets attract higher funding costs
(coupled with SGB’s credit rating of A+) b) Shortage and volatility of wholesale funding markets
Solutions:c) Review other alternative sources of fundingd) Take advantage of WBC’s credit rating of AA to obtain cheaper
source of funding for SGBe) Utilise WBC’s expertise on interest rate management
Risk level:
AMBER
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
KEY RISKS CONSIDERATIONSKey Risks DescriptionIntegration risks (post merger)
Common risks include:a) Resistance to changeb) Job securityc) Lack of skills and
experience in transformation processes
d) IT integration
Specific risks to WBC:a) Concerns over disruption to operationsb) SGB’s “small bank” culture (culture integration risks)
Solutions:c) Appoint Transformation team d) Appoint Transformation advocates from SGBe) Retain SGB brand name and branches whilst integrating the
head office and back office
Risk level:
AMBER
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
FINAL RECOMMENDATION
Buy 100% of SGB• Achieve the largest market capitalisation in Australia• SGB share prices are low now• To maintain competitive advantage, retain SGB branches and brand name
Offer price and approach• Friendly scheme of arrangement• All-scrip transaction
WBC offers Starting price Maximum price
Price per SGB share $30.85 $33.69
Total consideration $17.04billion $18.60billion
Exchange ratio (WBC : SGB) 1.3 : 1 1.42 : 1
TDT
The Dream Team
©2010
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
GDP FORECAST
Year - Actual 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1990 to
2007Australia GDP (%) 0.6 -0.6 2.5 3.7 4.6 3.3 2.7 3.7 4.6 4.2 2.5 3.7 3.2 3.5 1.9 2.7 2.4 3.9 2.95
% change -200% 517% 48% 24% -28% -18% 37% 24% -9% -40% 48% -14% 9% -46% 42% -11% 63% 26%
I/D D I I I D D I I D D I D I D I D I
European Exchange Rate Crisis. Asian Financial Crisis.
Year - Forecast 2007A 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F
2008 to 2018
Australia GDP (%) 3.9 -3.9 4.1 4.4 4.7 3.4 2.8 3.8 4.7 4.3 2.6 3.8 3.13
I/D D I I I D D I I D D I
Global Financial Crisis.Assumption: Lowest
GDP could happen is -200% of 2007.
Assumption: The movement from one year to another year is on a gradual basis to the maximum (120% of 2007) as the economy recovers.
Assumption:It follows 1995 and 1996 when the economy falls from the maximum.
WESTPAC’S PO
TENTIAL ACQ
UISITIO
N O
F ST. GEO
RGE
RELATIVE VALUATION APPROACH
Average CompanyP/E
CompanyP/NTA
CompanyP/B
$/Share $/Share $/Share
Low 25.24 14.44 14.44
Midpoint 36.06 20.62 20.62
High 46.88 26.81 26.81
Average 25.77
Average TransactionP/E
TransactionP/NTA
TransactionP/B
$/Share $/Share $/Share
Low 24.88 15.12 18.18
Midpoint 35.54 21.60 25.98
High 46.20 28.07 33.77
Average 27.70