ANZ Acquisition Of KEB Not To Dilute Equity
Citigroup is the latest investment bank to voice its opinion the impending acquisition of Korea Exchange Bank (KEB), by Australian banking major ANZ.
Fears that an acquisition would result in a capital raising by ANZ to fund an acquisition of a 57 per cent stake in KEB have begun to grow, and on Tuesday, Citi analyst Craig Williams sought to calm investor concerns.
Mr. Williams said that if ANZ raised fresh equity to fund the purchase, it would most likely be a small issue of $1.5 billion, which would result in a “negligible dilution”.
“Hence we think concerns are overplayed and are happy to retain ANZ as buy-rated and a top pick,” he said.
Estimates for how much capital ANZ would need to raise to fund the purchase have been as high as $3 billion, which Japanese investment bank Nomura said would be required to fund an acquisition for a 100 per cent stake in the target. Goldman Sachs estimates that ANZ would need to raise as little as $1 billion.
“Mike Smith (ANZ CEO) has been categorical in his statements that he will only buy ‘cheap’ assets. Given Korean press reports that no other bank is undertaking due diligence on KEB, it is increasingly likely he will achieve his objective.” Mr. Williams said.
The 57 per cent stake in KEB which is up for sale is owned by US private equity firm Lone Star, and Export Import Bank of Korea. According to Morgan Stanley, the stake is worth between $US2.9 billion to US$6.2 billion.
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ANZ May Bid For 100 Per Cent Stake In KEB
Australian banking major ANZ is thought to be considering the possibility of engaging in a full acquisition of Korea Exchange Bank (KEB), which would require the lender to raise as much as $3 billion in fresh equity.
The lender is currently conducting due diligence on acquiring a 57 per cent stake in the Korean bank, which is owned by Export Import Bank of Korea, and Private Equity Firm Lone Star.
Victor German, an analyst with Japanese investment bank Nomura says he expects ANZ to have to raise at least $1.6 billion, and would be very surprised if the lender was not considering bidding for a full 100 per cent stake in KEB.
“Under the new Basel III rules, ANZ would need to raise about $1.6bn for a 57 per cent stake and about $3bn for a 100 per cent stake, If ANZ is successful, we believe it would look to increase its stake over time. Full control would provide ANZ with both financial and strategic flexibility, and secondly, under the proposed Basel III capital rules, holding a controlling stake results in a dilutive earnings impact.” Mr. German said.
Not everyone is convinced that ANZ will be compelled to raise fresh equity. Last week Morgan Stanley said it did not see ANZ needing to raise capital to fund an acquisition based on prices ranging between 0.7 to 1.5 time price to book value. Such prices would imply a valuation of KEB of between US$2.9 billion to US$6.2 billion.
Lone Star acquired its stake in KEB as far back as 2003 and has so far made to unsuccessful attempts at exiting its investment and selling its stake in KEB. ANZ has embarked on a strategy of transforming itself into a super regional lender which derives at least 20 per cent of its group profit from Asia by 2012.
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ANZ Keeps KEB Funding Options Open
Australian banking major ANZ says it is keeping its options over regarding funding should it decide to go ahead with a $4.3 billion acquisition of a controlling stake in Korea Exchange Bank (KEB).
The lender already has enough regulatory capital to support the acquisition from existing cash reserves and debt. ANZ has a tier one capital ratio of 10.5 per cent and has said it will not rule out a future capital raising to maintain its strong position.
Reports surfaced over the weekend that the lender had finished its due diligence on KEB, but was continuing its examination of KEB’s books, with a deal likely to be completed by November at the earliest.
US private equity firm Lone Star has been seeking to sell its 51 per cent stake in KEB.
Many believe that should ANZ undertake a entitlements based equity raising, it would be well received by investors, given the recent strong performance of the lenders shares against its big four rivals.
ANZ was initially lukewarm towards a proposed acquisition in Korea, saying that the market was “a bit left field”, and that Korea did not constitute a key franchise market in the same way China and India under pin its super regional strategy.
Citing an opportunistic strategy ANZ chief Mike Smith says such an acquisition needs to evolve to include less important by attractively priced assets.
KEB controls as much as 45 per cent of the market for trade finance, and there is almost no pressure from other bidders, after ANZ bid an initial $2.6 billion.
ANZ’s board is currently holding its meeting in Shanghai this week, ahead of a likely announcement that the lender will incorporate a wholly owned local subsidiary in China.
ANZ said last November that it would invest an additional US$400 million in China as it seeks to expand in China by establishing as many as 20 branches by 2012.
The bank’s objective is to lift regional profits to 20 per cent of group earnings by 2012.
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CBA Wants To Raise Stake In Vietnamese Lender
Australian banking major CBA says it wants to raise its holdings in Vietnam International Bank (VIB), from the current level of 15 per cent to a proposed level of 20 per cent.
The lender said on Wednesday that intends to raise its holding in VIB once it completes its negotiation with the bank for strategic partnership.
CBA acquired the 15 per cent stake in the Vietnamese lender after it had confirmed it received regulatory approval for the sale which made CBA the solitary foreign strategic shareholder in April.
“Consistent with the strategic partnership agreement signed earlier this year, Commonwealth Bank intends to request an increase in the VIB investment to 20 per cent at the earliest opportunity – the maximum investment allowed by the State Bank of Vietnam,” CBA said in a statement.
CBA failed to disclose financial aspects of the transaction citing that the money concerned is below the materiality threshold for the company.
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NAB Officially Withdraws AXA Bid Paving Way For AMP
Australian wealth manager AMP is firmly in the driver’s seat to acquire AXA Asia Pacific Holdings (APH) after NAB officially withdrew its 10 month long $14 billion bid.
Cameron Clyne, chief executive of NAB made the decision public after the close of the market on Tuesday, following the decision by the competition regulator to deny support for the lenders bid to acquire APH.
“NAB remains very committed to participating in the wealth management industry, which is an important part of the bank’s future,” he said. “However, considering all the options, continuing with this agreement is not in the best interests of shareholders.”Mr. Clyne said in a statement.
NAB had re-tabled its bid, after the initial proposal was rejected by the Australian Competition & Consumer Commission (ACCC) in April.
The lender had proposed some concessions designed to allay the competition concerns held by the regulator, which included the divestment of retail investment platforms owned by the target to third parties.
After a long running saga, last week the ACCC once again failed to support the bid, ruling that a divestment would still fail to guarantee that there would be sufficient competition within the Australian wealth management industry.
NAB’s withdrawal no paves the way forward for AMP to proceed with its rival bid for APH, and a spokesperson for the company said the wealth manage remained strategically interested in APH at the right price.
With NAB’s acquisition attempt effectively over, the spokesperson added that AMP was “considering our position in the light of this announcement”.
The problem with AMP’s bid lies in the fact that a large fraction of its bid was made up of shares, the value of which has declined in recent months.
The Australian citing an unnamed source close to APH chairman Rick Allert suggests that Mr. Allert had a strong sense of value, and would refuse to endorse a bid that valued the company significantly below the price NAB had offered to pay.
In order for AMP to win board approval from APH, and access the company books, AMP will in all likelihood have to increase the value of its bid, and most likely increase its contribution whilst convincing APH’s parent AXA SA to do likewise.
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Competition Regulator Rejects NABs Proposed Acquisition Of AXA Asia Pacific Holdings
The Australian Competition and Consumer (ACCC) has given its final verdict on the proposed acquisition of AXA Asia Pacific Holdings (APH) by NAB, delivering what can only be described as a death blow to the proposed $13.3 billion bid, by saying it remains opposed to any deal.
The failure to give its blessing stalls NAB’s plan to become the clear dominant player in the Australian wealth management space, and further complicates APH’s parent AXA SA ambition to expand substantially in Asia.
The regulator stood by its earlier decision on April 19th when it rejected what would have been the second largest deal in Australian financial services history.
The completion watchdog argued that the acquisition would curtail competition in the market for supply of retail investment platforms, internet portals that link retail investors with the wide range of investment products that fund management companies provide.
Peter Kell, deputy chairman of the commission said that the proposed concessions by NAB and APH to divest the target company’s North investment platform to a smaller wealth manager, IOOF, “do not provide sufficient certainty that the ACCC’s competition concerns will be addressed”.
The regulators reasoning was that IOOF lacked the infrastructure required to make the investment platform a competitive force to be reckoned with in its own right.
The ACCC added that because both the acquirer and target company’s had failed to agree to include their combined distribution network of financial planners, or sell products supported by the North platform to IOOF, there was “considerable uncertainty” that IOOF could become an effective competitor to the combined NAB-AXA.
“The undertakings as proposed place a heavy reliance upon IOOF having sufficient distribution capability to provide an effective competitive constraint upon existing key players in the foreseeable future,” said Mr Kell.
APH’s stock price fell sharply as trading opened, falling by as much as 8.6 per cent by early afternoon trading, with Goldman Sachs saying that NAB was likely to call it a day with its bid.
“In our view, the most likely option is for NAB to walk away and pursue an organic acquisition strategy of advisers rather than a large acquisition,” Goldman Sachs analyst Ben Koo said in an early note to clients.
Contrastingly NAB stock rallied 3.8 per cent on the news.
Goldman’s Koo said that whilst it was possible that NAB may challenge the decision, or restructure its bid to include the sale of its financial planning network, cosmetic changes to a deal may still not guarantee approval.
“In the near term, fears of a large capital raising will now dissipate for NAB however M&A uncertainty will remain an overhang until NAB clarifies its response to the ACCC decision,” said Mr Koo.
NAB said earlier it is considering the implications of the decision and will update the market “as soon as possible”.
The other interested parties to the deal including rival bidder AMP all said they would evaluate their position before outlining what their next steps would be.
AXA SA, the French parent of APH said through a spokesperson that it was disappointed with the regulators decision, but will review the decision carefully before further commenting.
APH said through a statement that it had taken note of the decision but a spokeswoman wasn’t immediately available for further comment.
Rival bidder AMP for its part welcomed the decision and said it continues to find APH an attractive strategic target, but did not feel compelled or sense any urgency in making any quick moves.
A spokeswoman for AMP said whether the group will seek fresh talks with AXA SA is “a decision for another day”.
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Competition Regulator Decision On AXA Takeover Imminent
The Australian completion regulator says it will make public its final decision over whether NAB will be given approval to acquire AXA Asia Pacific Holdings (APH) on Thursday.
It remains to be seen whether NAB has done enough in the long running takeover saga to satisfy the concerns of the Australian Competition and Consumer Commission (ACCC), and finally be given approval to go ahead with the merger valued at $13.3 billion.
The ACCC for its part has indeed confirmed that it expects to announce its final decision on the compromises offered by both NAB and APH, for what could quite well possibly end up being the second largest deal in the Australian financial services sector.
The regulator have previously provided guidance of September 9th as the day it would reveal its final decision, and on Wednesday a spokesperson said the date remained unchanged.
As a concession to the regulator’s concerns, NAB had pledged to divest APH’s North investment platform.
If the concession is accepted, and the bid ultimately successful, the acquisition would then become the second largest financial services takeover since Westpac acquired St. George in a $16 billion merger in 2008.
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Fund Manager Urges Merger of Bendigo And BoQ
A fund manager with holdings in both Bank of Queensland, and Bendigo & Adelaide Bank has backed a proposed $5.5 billion merger plan between the two lenders, even going so far as to demand that a merger takes place.
Geoff Wilson, chairman of fund manager Wilson Asset Management has said that the boards of both lenders should indeed consider the merger, which makes both strategic and legal sense.
“We’re long-suffering Bendigo shareholders and we’re annoyed and frustrated they did not accept the original BoQ offer when it arrived three years ago. In that time, they have managed to almost blow the bank up by its merger with Adelaide Bank. From my perspective, there’s a clear logic for the two to merge.” he said.
Mr. Wilson endorses the idea that a merger between the two lenders would indeed help cut costs of a combined entity whilst enabling the new merged lender to upgrade credit ratings.
A long standing complaint amongst Australian regional lenders is that lower credit ratings make wholesale funding more expensive and difficult to access.
David Liddy, chief executive of BoQ has long campaigned for a more level playing field, where the cost of funding for regional lenders are lower.
“In a financial services merger you always have one of the cost bases reduced by about 30 per cent. There would be very strong ratings effects too. You have two BBB+ organisations and their profitability would pick up significantly because of their reduced costs. You would think the rating would be pushed into the ‘A’s if the two banks were put together.” Mr. Wilson said.
In endorsing the merger, Mr. Wilson said that the boards of the two lenders must put aside any existing animosity, and seriously consider a potential deal which would likely have positive implications on its credit ratings.
“This would change the dynamics of the organisation. I think the boards have got to realise they are there to do their best by the shareholders. Bendigo Bank has destroyed their shareholders’ value in the last three years. The only reason why the board has survived is that there is not a great number of institutional shareholders on their registry. The directors would be removed if there was a strong institutional presence.” he said.
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Markets Still Undecided Over Potential Bendigo And Bank of Queensland Merger
The implications of a proposed merger between Bendigo and Adelaide Bank and Bank of Queensland is still being weighed by financial markets, who have yet to bestow their blessing on such a deal.
A report in The Australian suggested that the chairmen of the two lenders met recently to discuss the potential for a merger which would be valued at $5.5 billion.
According to the report, it is believed that the two discussed the potential benefits of a transaction, and in particular, whether a deal would result in a higher credit rating for the merged financial institution.
Currently both lenders carry a BBB+ rating which implies that their funding costs are higher than the Big Four Australian banks, all of whom are rated AA.
Ratings agencies on Thursday declined to issue guidance, citing that it was still too early, and that there was a requirement for “financial metrics” before the implications on credit ratings could be calculated.
The Australian, which quoted an unnamed source close to Bendigo and Adelaide Bank said that poor relations between the two lenders would make a merger difficult. Bendigo chairman Robert Johanson has a very public poor relationship with BoQ chief executive David Liddy.
The source also suggested that Bendigo did not feel compelled by the benefits of a merger in the same was as BoQ.
BoQ has long desired to be an acquisition target, but in its quest to be acquired, has so far failed to find a buyer or a marquee shareholder.
In an interview with The Deal, BoQ chief Liddy said he believed that consolidation within the mid tier regional lending space was inevitable and that if there was interest by Chinese lenders in Australian banks “send them to Queensland”, in direct reference to his organisation.
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Australians Believe Not Enough Competition In Banking
A survey undertaken by Australian wealth manager AMP suggests that nearly 78 per cent of all Australians believe that acquisitions by banks should be restricted.
It is no coincidence that the survey results were released on the eve of the ruling by the competition regulator on National Australia Bank’s proposed acquisition of Axa Asia Pacific Holdings.
According to the AMP survey, an overwhelming majority of 71 per cent of people polled say they believe that there needs to be increased competition within the Australian financial services sector.
AMP is a rival bidder for AXA Asia Pacific Holdings, and is in a holding pattern until the ACCC rules on competition issues regarding NAB’s on September 9th.
AMP said it released the results of the survey this week, despite the survey being conducted in March because it felt the results were timely given the uncertainty surrounding the outcome of the federal election.
“We’re looking at how we can grow AMP Bank, and we’ve issued this now because it’s a tumultuous times in politics,” and AMP spokeswoman said.
The survey results also suggest that many Australians felt that the federal government is too soft on the big four banks. 68 per cent of those polled say they would like to see increased regulation of the industry, whilst half of those polled believe that M&A activity within banking has resulted in less choice for consumers.
Those kind of survey results should come as no surprise given that concentration of market share amongst the big four lenders has increased given the recent spate of mergers and acquisitions. Westpac acquired St George in 2008, whilst CBA acquired Bankwest.