Australia's Westpac bids $17.6 billion for St George

By Miranda Maxwell

SYDNEY (Reuters) - Westpac Banking Corp Ltd (WBC.AX) launched a $17.6 billion all-share bid for smaller rival St George Bank Ltd SGB.AX in a tie-up that would create Australia's biggest bank by market value.

Analysts said the deal could trigger further consolidation in an Australian banking sector that, while dodging the worst of the subprime crisis, is still grappling with higher funding costs since the onset of the global credit crunch last year.

St George said its board would recommend the A$18.6 billion offer, priced at a 24 percent premium to St George's closing price on Friday.

"It's the type of premium that would have to be offered to be considered seriously," said White Funds Management portfolio manager Angus Gluskie.

Westpac offered 1.31 of its own shares for every St George share, or A$33.10 a share based on the Friday closing prices for both companies, excluding already declared dividends.

The combined entity would have a market capitalization of around A$66 billion, overtaking Commonwealth Bank of Australia's (CBA.AX) A$61 billion. It would rank second to National Australia Bank (NAB.AX) by asset value.

Shares in St George jumped 28 percent to A$34.20 after the announcement. Westpac eased 3.2 percent to A$25.11 in a flat overall market .AXJO.

Gail Kelly, Westpac's chief executive who joined the bank less than four months ago after heading up St George for nearly six years, noted 2008 had brought a "new world."

"I left St George in August last year. That was a different time. Challenges in financial markets (are) very materially different now from then," Kelly told journalists.

St George has been struggling with soaring funding costs in the debt markets. Earlier this month, it had to pay more than 10 times the margin it paid a year ago for a debt issue.

Westpac's offer comes just days after St George disappointed markets by trimming its earnings forecast due to the higher funding costs.

Bank customers are also feeling the pinch of higher interest rates. Australia's official interest rate is at a 12-year high.

CONSIDERED TIMING

Analysts noted that Westpac was trading on Friday at the highest price-to-earnings multiple of any of the top banks, at 12.5 times forecast 2009 earnings per share.

"The timing of this transaction appears to have taken into consideration the relative PE ratings of the two stocks," said a research note from UBS, which estimated St George was trading at around 10.9 times forecast 2009 earnings before the offer.