Any deal that creates a country’s largest domestic bank, its top fund manager and the second biggest insurer will have ramifications for all market participants. The Commonwealth Bank of Australia’s (CBA’s) takeover of Colonial Limited also provides a springboard for CBA to launch its international aspirations.
It is the largest takeover in Australian corporate history. CBA is offering seven of its shares for every 20 of Colonial’s in a pure scrip-for-scrip deal. Other than entitlement to dividends, there is no cash on the table at this stage. Based on a CBA share price pre-announcement of A$25, the deal values Colonial at around A$9 billion. CBA will not know until mid-May whether the transaction will be approved by the necessary 50% (by number) and 75% (by value) of Colonial’s shareholders. It gives time for another party to launch a counter-offer.
The CBA oVer is a stunning last hurrah for Colonial’s managing director, Peter Smedley, who rebuilt it from an inauspicious mutual life office into the leading Allfinanz house in Australia. Following the bargain purchase of the State Bank of New South Wales in 1994, Colonial listed on the Australian Stock Exchange in May 1997 at a retail oVer price of A$2.60. The takeover provides a share value of over A$8. Colonial shareholders will hold 25% of a bank with A$220 billion of assets and A$83 billion of funds under management.
The transaction confirms the power shift away from traditional banking to broader Financial services. Although CBA’s managing director, David Murray, clearly welcomes Colonial’s bank and insurance businesses, from which considerable cost savings are expected, the high growth story is fund management. Colonial First State Investment Managers (CFS) is the second largest fund manager in Australia and a stellar performer. CFS’s distribution is primarily external Financial advisers and planners, while CBA uses its in-house retail network. The purchase overcomes CBA’s weak third-party selling platform, and reduces the reliance on traditional bank products.
In announcing the merger, CBA highlighted several motivations: its desire to move beyond Australia in an increasingly global industry; the restriction of the so-called Four Pillars government policy which prevents mergers between CBA, Westpac, ANZ and the National Australia Bank (NAB); CBA’s large internal capital generation; and the desire to capture a greater share of the burgeoning superannuation industry. Says group treasurer Ray Wilkie: “It provides additional Flexibility in the way we grow the business, including an international platform for our strategic thinking.”
Colonial was on the verge of making a bid for the 55% of Perth-based Bank of Western Australia, owned by the Bank of Scotland.
Murray needed to move quickly. The Australian Competition and Consumer Commission (ACCC) was likely to prevent the CBA/Colonial deal, if three banks in Western Australia suddenly became one.
The transaction is putting pressure on the other major Australian banks, particularly the NAB and its managing director, Frank Cicutto.
Having seen his share price fall from a high of over A$30 to around A$21 within the last 12 months, Cicutto does not have the scrip-for-scrip firepower that Murray wields. CBA will leapfrog NAB as the largest domestic bank, and the Melbourne-based bank is a poor ninth in Australian fund management. This leads to market speculation that Cicutto is eyeing the largest fund manager in the country, AMP.
AMP’s vulnerability, turning it from predator to prey, stems from its disastrous takeover of insurer GIO, where a billion dollars of reinsurance losses were realized after the purchase. AMP’s funds and insurance activities appear a neat Fit for NAB, including the UK businesses of Pearl, NPI, Hendersons, London Life and Virgin Direct. NAB already owns Yorkshire Bank, Northern Bank, National Irish Bank and Clydesdale Bank.
Murray and Cicutto are in a race against time.
The ACCC has indicated a preference not only for the independence of the major banks, but the retention of strong regional institutions.
The more banks merge, the greater the political will to retain the surviving few.
Banks such as St George, Suncorp Metway, Adelaide Bank and Bank of Queensland are considered important local and national competitors. The ACCC must also approve the deal, and has given an undertaking to respond within eight weeks of receiving CBA’s Final submission, expected in early April.
Assuming he is successful, Murray’s greatest challenge will be to retain Colonial’s two million customers. He knows that Westpac has struggled to retain Bank of Melbourne customers following its 1997 acquisition, and further back, he experienced personally a signiWcant loss of customers when CBA acquired the old State Bank of Victoria. This has been cited as one reason why CBA’s shares fell over A$2 shortly after the merger became public.
The other challenge will be to extract the A$300 million in cost savings which Murray has promised, to ensure the merger is earnings-per-share positive after two years. CBA has already admitted that 2,500 jobs will go and 250 retail branches will close. Political acceptance of this shows how things have changed. When the New South Wales government sold its state bank to Colonial in 1994 for A$576 million, it barred any of the major banks from bidding. The rationale was to retain jobs and branches, and to encourage competition in banking services. Removing the four most likely buyers struck hundreds of millions of dollars from the sale price, and allowed a massive transfer of wealth from the state coVers to Colonial shareholders. Five years on, the federal treasurer, Peter Costello, gave his approval for CBA to merge with Colonial without a whimper.
