Grant Samuel unhappy with St George model

Bank takeovers don't always generate value for the buyer, a point conceded by Grant Samuel in the firm's analysis of the proposed purchase of St George by Westpac.

Or as Grant Samuel put it in the scheme booklet prepared for St George shareholders, the extent of synergies was, historically "not unambiguous".

Even so, Grant Samuel went through the ritual of developing a valuation, and one that largely accepts the assumptions and budgets of the management of Westpac and St George.

The firm valued St George in the range of $17.5 billion to $20 billion, which corresponds to a value of $30.62 to $35.02 per share. Westpac has offered 1.31 of its shares for each St George share, with St George shareholders also getting to keep an inflated final dividend payable in November.

The credit crunch forced Grant Samuel to adopt a wider valuation range than it otherwise might, with the firm noting that there was "significant uncertainty in estimating a value for St George in the current environment".

Grant Samuel valued the banking business of St George in a range from $15.4 bilion to $17.6 billion.

The stand alone value of the St Gorge banking business Grant Samuel put at between $13.4 billion and $15.3 billion, with the value linked to "operational synergies" from the merger at between $2 billion and $2.3 billion.

The modelling assumed revenue attrition of 2.5 per cent each year. Grant Samuel otherwise accepted Westpac's projections for the purpose of the valuation, including savings in the St George cost base of between 20 per cent and 25 per cent a year, lower funding costs (given Westpac'ss better credit rating) which Grant Samuel estimates at worth $130 million a year and implementation costs of $700 million incurred over two years.

The firm did not produce a separate valuation of St George's mortgage insurance business. This banking valuation included the margin lending business, given that it is capital intensive, thoguh St George operationally manage this business through wealth management.

Grant Samuel noted that St George's 2009 budget was prepared on the basis of funding scenarios that fell between the extremes of being available and with higher costs passed through to customers with no consequence to volume, and funding being constrained for all lenders.

Another detail of interest is the Grant Samuel statement, presumably based on data supplied by St George, that it has a 14.7 per cent share of the residential loan market in New South Wales.

The Grant Samuel report also includes the observation that "St George has not developed a detailed, integrated and flexible model for its banking business".

Grant Samuel did not elaborate on this backhander.