Share bonus if Westpac and DBS merge

By DANIEL RIORDAN

Thirty thousand New Zealanders holding Westpac New Zealand class shares may be in for a $129 million early Christmas present.

Reports from Australia say Westpac Banking Corp is talking mergers and acquisitions with Singapore's DBS Group. If a deal goes ahead, Kiwis will be able to swap their 54 million underperforming NZ class shares for head shares which were yesterday effectively worth $2.37 more.

Westpac officials refused to comment yesterday on Australian news reports that Westpac was negotiating with DBS about an equity swap that could open the Australian bank's expansion into Asia, but industry analysts said proposals included a full-scale merger.

That may be of the kind recently consummated in the United States, where Chase Manhattan acquired JP Morgan in a $US30 billion deal by issuing Chase shares to Morgan shareholders.

DBS was thought more likely to do the driving, but regardless of who took the lead, the benefits for Westpac NZ shareholders would be clear.

"If something happens, it will be very positive for Westpac NZ shareholders," said Ord Minnett broker Arthur Lim.

That is because if Westpac's ownership structure changes dramatically, Westpac NZ shares will convert to Westpac shares under an exchange deed which formed part of the original share offer. The deed outlines a range of events which would trigger conversion.

If more than 30 per cent of Westpac's shares are acquired by one party, New Zealand shareholders can choose to convert. If more than 50 per cent of Westpac's shares are acquired, the conversion becomes mandatory.

In practice, any acquisition of more than 20 per cent would trigger the conversion, as Australian sharemarket rules require acquirers to move to full ownership once past 19.9 per cent.

Westpac created a class of New Zealand shares last October.

After taking account of the exchange rate, and the fact that an instalment payment of $4.75 is still owing on the Westpac NZ shares (payable in December), share prices on both sides of the Tasman should be the same.

But that has not proven the case at all.

The NZ class shares have consistently traded at a heavy discount to the Australian head shares, annoying local investors.

Yesterday, Westpac shares closed at $A12.75 ($16.82). Subtracting $NZ4.75 for the amount owing on the second instalment takes that down to $NZ12.07.

But Westpac NZ shares closed at $NZ9.70, $2.37 or 20 per cent lower than they should be.

Analysts cite two main reasons for the discrepancy.

One is the relatively illiquid nature of the New Zealand shares - there are only 54 million on issue compared with 1.8 billion head shares.

The other is the disillusionment of institutional investors at the decision of Westpac head office not to extend its buyback of 100 million shares to New Zealand. Westpac has argued that the New Zealand shares were still only partly paid and had yet to find their level.

An upsurge in demand for Westpac NZ shares is thought likely, given that their holders could soon have the opportunity to convert at no cost to head shares worth $2.37 more.

DBS is one of the largest banking groups in Southeast Asia, with a market capitalisation of $A24 billion - slightly above Westpac's $A22.9 billion. It has a customer base of five million and 10,000 staff.

The Singapore Government owns 35 per cent of the group's ordinary shares, which are listed on the Singapore Stock Exchange.

The presence of a shareholder as deep-pocketed as the Singapore Government gives DBS uncommon ammunition in any play it may make for Westpac.

The Australian Government's Four Pillars policy prevents mergers among the country's biggest four banks, including Westpac, which has forced them to look outside Australia for partners.