An Analysis of the

Westpac Offer to St. George

The Dream Team
Agenda

2
Our Team
Brief Background of the Westpac Offer

Consideration


♦ Proposal to exchange 1.25 WBC ordinary shares for each SGB ordinary
share
♦ All-scrip merger
♦ A Scheme of Arrangement (“Scheme”) is to be effected subject to SGB
shareholders’ vote
♦ Senior management team to be drawn from both banks
♦ SGB Chairman appointed as Deputy Chairman with two other SGB Directors
to join the WBC Board
♦ Operating model for the merged entity is to retain all WBC and SGB brands
and branches/ATM networks
♦ A two-week “Exclusivity Period” to conduct reciprocal due diligence and
negotiate a Merger Implementation Agreement
♦ Break fee of $100m is proposed


Conditions precedent


♦ An Independent Expert’s Report concluding the Scheme

♦ SGB shareholders’ vote
♦ Court approval and other regulatory rulings and consents
St. George: Current Position in Market Capitalisation

C u rre n tly
5 th L a rg e st

5
Advantages and Disadvantages of Westpac Offer

Advantages
 ♦ Be part of the largest market capitalisation in Australian
banking history
♦ Benefit from cheaper cost of funding using WBC’s AA
credit rating
♦ Cross-selling opportunities in the largest retail and
wealth management network in Australia
♦ Cooperate with Westpac to tackle intense competition in
the regional banking sector
♦ Access to WBC’s resources and expertise
♦ Accretive EPS for SGB
♦ SGB shareholders obtain CGT rollover relief on the all-
scrip merger
♦ Guaranteed SGB representation in senior management
Disadvantages ♦ Potential customer attrition


♦ Integration risks involved

♦ Staff resistance due to job security issues

6
Westpac Offer: Risks Considerations

Customer
 Issue:


Attrition ♦ Existing customers leave SGB resulting in shrinking

market share and damaging its reputation


Recommendations:


♦ Customer relations management

♦ Media publicity management
♦ Retain SGB branches and ATM networks to maintain
presence
Integration
 Issues:


Risks ♦ Concerns over disruptions to operations during the

integration process
♦ Culture integration issues – SGB “Big enough but small
enough” to be customer-focused


Recommendations:


♦ Appoint transformation advocates from both SGB and

WBC
♦ Utilise WBC’s market -leading risk management
systems
7
Proposed Merged Operations
Merged Westpac and St. George Business Model

Product & Operations

Technology
Core/Support

Opportunities for Growth after merging with WBC



♦ Cross-selling to within the wider distribution channel in retail

banking segment
♦ Extension of wealth management segment
♦ More prominent presence in NSW and other states

8
How likely is the proposed model to be successful?
Key Features of the Proposed Operating Model


♦ Minimises the risk of the large-scale disruption

Multi-Brand
Strategy
♦ Minimises customer and value leakage
♦ Offering a broad range of products

C om m on ♦H ig h e r p o ssib ility o f su cce ss in th e in te g ra tio n p ro ce ss

S tra te g ic ♦B e tte r co n so lid a tio n o f p ro d u cts a n d o p e ra tio n s
F ra m e w o rk ♦E a sie r a lig n m e n t o f b u sin e ss stru ctu re s

D istin ct ♦C a te rin g to a b ro a d ra n g e o f cu sto m e rs

B ra n d ♦W e stp a c : “ A professional, aspirational bank with a social
P e rso n a litie s conscience”
♦St. George: “A bank with humanity”
♦

9
Factors Determining Whether the Merger is Successful
K e y F a cto rs
S u cce ssfu l W h e n
♦ Customer Attrition Rate
 Customers ♦ Market Share
♦ Customer Satisfaction Index
 Low
♦ Realised Cost Synergies
 Increase
♦ Realised Revenue
 Maintain
Benefitsor Increase
 Synergies ♦ Realised Funding Benefits
♦ Actual Integration Costs
♦ Cost to Income Ratio
 As Expected or Higher
♦E m p lo ye e Tu rno veAs r R Expected
a te or Higher
E m p lo y e e s Aso Expected
♦E m p lo ye e S a tisfa

cti n In d e x or Higher

M a iExpected
As n ta in o r Dor
e cre a se
Lower
♦E a rn in g s Pe r S h a reM a in taDecrease
in o r In cre a se
S h a re h o ld e rs ♦S h a re Price Pe rfo rm a n ce
In cre a se
B e tte r
10
Valuation

11
Valuation Summary

W B C O ffe r:
3 2 .4 6

C u rre n t S G B :
2 6 .6 5

12
Synergies

 Total Benefits: $222 million



 Assumptions:
♦ Cost Synergies - 25% of
operating expenses (Empirical
evidence of 20-30%)
♦ Restructuring Costs- 161.5% of
cost synergies (Average of
precedent transactions)
♦ Funding Benefits - 48% of
Deposits and other borrowings
at 60 bp (May 2008)
♦ Revenue Synergies - 25% of
SGB revenue $2.3 billion
realised over 10 years.
♦
 Who Benefits?
♦ Both St. George and Westpac
♦

13
Implied Value

Im p lie d V a lu e is N E G A T IV E
co n sid e rin g S y n e rg ie s

14
EPS vs. Exchange Ratio Analysis

W e stp a c O ffe r
S G B C u rre n t E P S

15
Next Steps for St. George

16
Alternatives and Impact

17
Alternatives and Impact

Renegotiate
 ♦ SGB renegotiates terms to benefit SGB stakeholders:
♦ Higher offer price
♦ Retention of key SGB senior management
team
♦ SGB final dividend to be declared to SGB
shareholders
♦ No break fee of $100m at the moment
♦ Confidentiality Agreement
♦
 WBC’s Potential Reaction:
♦ Proceed to renegotiate additional terms taking into
Accept
 ♦ consideration
Agree of WBC’s maximum
on Merger Implementation offer price
Agreement
♦
♦ WBC Offer is communicated to SGB shareholders and
prepare for shareholders’ vote
♦ In the mean time, regulatory and government
approval processes are underway
♦ If SGB shareholders vote in favour of the merger
proposition, a Court Approval needs to be obtained
♦ Subsequent to the Court Approval, merger becomes
official


18
Alternatives and Impact
 Reject ♦ SGB continues to grow organically, however, explore
alternative funding sources


WBC’s Potential Reactions:



♦ Offer a higher premium to sweeten the merger deal

♦ Abandon the merger proposition entirely
♦ Hostile takeover


SGB’s Defensive Action:



♦ Super-majority shareholder voting

 Delay ♦ SGB appoints experts to perform in-depth reviews of


the merger proposition


WBC’s Potential Reactions:



♦ Further negotiations to convince SGB Board

♦ If delay too long, WBC may change the WBC Offer or
abandon the merger proposition entirely


SGB’s Defensive Action:



♦ Negotiate for “SGB Review Period” clause including a

Confidentiality Agreement


19
Other Matters

Exclusivity Period


♦ Include an exclusivity period of two weeks to conduct reciprocal due

diligence and negotiate a Merger Implementation Agreement
♦
Break Fee

♦ Exclude the break fee of $100million as proposed by WBC to allow SGB to

have more optimal alternatives for consideration


20
Key Messages to St. George Shareholder’s

WBC Offer


♦ Renegotiate the WBC Offer and additional terms with WBC

♦ All scrip-merger
♦ Scheme of Arrangement


Merits of the merger proposition



♦ Benefit from cheaper cost of funding using WBC’s AA credit rating

♦ Cross-selling opportunities in the largest retail and wealth management
network in Australia


Outcome of the merger proposition



♦ Accretive EPS
♦ Retain SGB brand and branch/ATM networks
♦ Be part of the largest market capitalisation in Australian banking history


21
Other Considerations

22
Other Considerations
Potential Other Big Four Banks – CBA, NAB and ANZ – may


Bidders counter-bid the offer to acquire SGB. This will

for SGB
increase the premium that WBC has to offer in
order to clinch the deal.
 

CBA


♦ Huge cash surplus and high share prices

♦ However, facing domestic competition issues


NAB


♦ Previously a major shareholder in SGB

♦ Could make an offer for SGB if it opts to forego
overseas expansion
♦ However, massive capital investment has been
injected overseas


ANZ


♦ Previously a major shareholder in SGB

♦ However, ANZ changed its strategic focus and moved
on to expanding in the Asian region
♦ 23
Other Considerations

Government
 Issues:
Approval on Possibility of monopoly subsequent to the merger

the Proposed ♦ ACCC may view each Australian state as a separate

Merger banking market – NSW is the main issue
 ♦ WBC and SGB, combined, will be the largest amongst all
the Big Four Banks in Australia
♦ 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
♦ Impacts on national interests
♦
Recommendations:

♦ Merger plan, demonstrating the impacts of the merger

on various aspects, need government approval
♦ Bring in government lobbyists
♦


24
Final Recommendation


Renegotiate with WBC



♦ Offer price
SGB counter offer Starting price Lowest price



Price per SGB share $34.64 $32.65
 Total consideration $19.13billion $18.03billion
 Exchange ratio (WBC : SGB)1.33 : 1 1.26 : 1


♦ Retention of key SGB senior management team

♦ SGB final dividend to be declared to SGB shareholders
♦ No break fee of $100m at the moment
♦ Confidentiality Agreement
♦

25
Thank you

26
 GDP Forecast
Year - 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1990
Actual to
2007
Australia 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
GDP (%)
% change - 517% 48% 24% -28% -18% 37% 24% -9% -40% 48% -14% 9% -46% 42% -11% 63% 26%
200%
I/D D I I I D D I I D D I D I D I D I

E u ro p e a n E x ch a n g e R a te C risisA. sia n F in a n cia l C risis .

Year - 2007A 2008F 2009F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F 2008 to
Forecast 2018
Australia 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
GDP (%)
I/D D I I I D D I I D D I

G lo b a l F in a n cia l C risis .
w e st G D P co u ld h a p p e n is A ssu
- 2 0 m0 %
p tio
o fn2: 0 0 7 .
It fo llo w s 1 9 9 5 a n d 1 9 9 6 w h e n th e e co n o m y fa lls fro m t

e m e n t fro m o n e y e a r to a n o th e r y e a r is o n a g ra d u a l b a sis to th e m a x im u m ( 1 2 0

27
Relative Valuation Approach
Average Company Company Company
P/E P/NTA P/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 Transaction Transaction Transaction

P/E P/NTA P/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