ANZ’s $4.9 billion purchase of Suncorp’s banking unit has created the nation’s third-largest home lender and deposit taker in what is the biggest local bank deal since Westpac bought St George in 2008.
But what does the transaction mean for the legion of ANZ and Suncorp shareholders?
What are ANZ shareholders entitled to?
The first order of business for ANZ shareholders is the $3.5 billion of new financing the bank is seeking to fund the transaction.
ANZ is issuing 187 million new shares, which is about 6.7 per cent of the shares currently on issue to raise about $3.5 billion (with the $1.5 billion or so balance being sourced from its existing cash pile).
This means that one new share will be issued for each existing 15 shares. To raise this money, ANZ has opted for an equity-raising structure known as a pro rata, accelerated, renounceable offer.
Such a structure allows for both institutional and retail investors to subscribe to the new shares in proportion to their existing holdings, and if they choose not to they can transfer their right to take up the shares to another prospective buyer.
The new shares are being issued at a price of $18.90 which is a 12.7 per cent discount to Friday’s closing price of $21.64.
That sale begins on Monday to existing institutional investors of ANZ (such as super funds and fund managers) who can either take up the shares if they like the price or they can sell their entitlement to buy the shares at the $18.90 price later in the week.
For mum and dad investors, they too are entitled to buy 1 share for each 15 they hold, and can take up some or all the securities to which they are eligible. The retail offer closes around one month from now on Monday 15 August.
What if you don’t take up the shares?
If ANZ shareholders don’t choose to take up their shares, they too can sell their entitlement to buy the shares on the ASX – with trading of the rights enabled from July 21 to August 8.
The value of these entitlements will depend on the traded price of ANZ shares during that period.
The higher ANZ shares trade above $18.90, the greater the value of those entitlements. But if ANZ slips below the offer price, they will effectively be worthless.
The final size of the capital raising, which is estimated to be about $3.5 billion will depend on the ultimate level of demand from mum and dad investors.
The ANZ share price will resume trading on July 21, after the institutional leg of the capital raising is complete.
As to where it trades depends on a range of market factors, which are particularly volatile at present.
But the expectation is the shareholders who have participated in the equity raising are compensated, or at the very least protected, by the 12.7 per cent discount.
What are the costs and benefits to both companies?
ANZ says the deal will be neutral for its earnings per share (EPS) for the present financial year. In other words the earnings it is buying from Suncorp will increase in proportion with the increase in its share count so that EPS are unchanged.
But after accounting for some of the benefits of the acquisition, earnings per share should increase by as much as 5 per cent, this year and into the future.
There will be costs of about $680 million over four to six years and transactions always have integration risks.
But the benefits include increased cost savings from greater scale and shared systems, while the combined bank can hold less shareholder capital against home loans, due to ANZ’s major bank status.
Chief executive Shayne Elliott made the point that even though the transaction is large and significant, it is in the context of the broader ANZ group, which has one of the smaller retail banking businesses of the big four, with larger weightings toward institutional, business and markets banking.
And he said that even though the earnings uplift seemed modest, there was more upside than downside for shareholders.
For that reason, he said the Suncorp purchase was a “good transaction” that was more compelling than simply using spare cash to buy back shares (share buy back improve earnings by reducing share counts.)
What about dividends?
But will this $4.9 billion splurge put ANZ’s dividend in jeopardy?
Chief financial officer Farhan Faruqui says not. The bank is committed to maintaining both its dividend and dividend pay-out ratio of 60 to 65 per cent of earnings, and if anything expects the business to be generating more capital to be paid out.
In fact, there’s a benefit for retail shareholders in that the locally sourced Suncorp bank earnings will increase the proportion of franking dividends paid by ANZ.
As for Suncorp, the group will receive $4.9 billion of cash from ANZ, which it says will yield net proceeds of $4.1 billion. This, it said represents an estimated value of $3.21 per share (based on the accounting value of the banking business and the number of Suncorp shares on issue).
Based on the last closing price of $11.10, that represents about 30 per cent of the market value of the group.
Suncorp says its intention is to “return the majority of proceeds to shareholders”. So, all things being equal, shareholders of Suncorp should expect a cash distribution of up to 30 per cent of its value as the banking business is transformed into a $4.1 billion pile of cash.
When Suncorp’s shares resume trading, the value should proportionately reflect the cash bid, the small possibility that the deal may not be completed and the long-term prospects of the core insurance business.
One final point on the format of the capital raising: the pro rata accelerated renounceable offer.
The structure seems deliberate after ANZ’s ill-fated 2015 capital raising. While that $3 billion raising was the subject of a controversial cartel case, it was widely criticised at the time for being unfair to retail shareholders.
ANZ chose to do a quick-fire raising to institutions at a small 5 per cent discount but smaller investors were given limited access to buy shares as part of a $500 million retail offer.
Then-ANZ chief Mike Smith said the bank wanted to raise the money quickly and cheaply and noted that the bank had a relatively small retail shareholder base.
This time the ANZ board is not taking any chances by making sure that even though it has a relatively smaller base of retail shareholders, they are well looked after.
More on the ANZ-Suncorp deal
- ANZ’s ‘once-in-a-lifetime’ deal comes with complexity Shayne Elliott says seven years of simplification has set ANZ up for the $4.9 billion acquisition of Suncorp’s bank. But with growth comes complexity.
- ANZ to buy Suncorp bank in $4.9b ‘cornerstone’ deal The bank confirmed its raising fresh capital to finance its $4.9 billion purchase of Suncorp Bank and pledged to keep its branches open for three years.
- Macquarie, UBS launch ANZ Bank’s $3.5b raising ANZ Banking Group shares won’t trade until Thursday, allowing time for the group to go cap in hand to shareholders with a $3.5 billion raising.
- Shayne Elliott’s banking epiphany ANZ’s tilt at Suncorp is a way for the Melbourne-based lender to claw back some of the share it has ceded in the crucial home lending market over the past four years.
- ANZ/Suncorp deal will be first test for new ACCC boss The watchdog has long bemoaned the market power of the big four banks, but proving that an ANZ takeover of Suncorp will substantially lessen competition may prove complex.
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