Bank of Queensland Limited
(ASX: BOQ) has announced that it’s going to acquire ME Bank for $1.325 billion, to create a compelling alternative to the big banks.
What is BOQ doing?
BOQ is going to buy the super fund-controlled ME Bank for $1.325 billion and it’s going to fund it with a $1.325 billion capital raising. The raising will be done with an underwritten 1 for 3.34 pro-rata non-renounceable entitlement offer as well as a underwritten $350 million institutional placement at a share price of $7.35 per share, a 12.6% discount to the last BOQ closing price.
The acquisition price implies an acquisition multiple of around 1.05 times ME Bank’s FY20 reported book value and about 11.9 times ME Bank’s FY20 underlying cash earnings.
Pre-tax annualised synergy benefits of approximately $70 million to $80 million are expected by the end of year 3 of ownership, with approximately 75% of synergies to be delivered on an annualised basis by the end of the second year after the deal is done. However, pre-tax integration costs are estimated to be between $130 million to $140 million, with the majority of these costs to be incurred within the first two years.
The deal is expected to be completed before the end of BOQ’s FY21.
How much will this add to BOQ’s earnings?
BOQ said the the deal will add to cash profit / earnings per share (EPS) by between low double digit to mid-teens including the full synergies in the first year (FY22). The deal is also expected to improve the cash return on equity (ROE) by over 100 basis points (1.00%) including full run rate synergies in the first year.
Non-financial benefits
Bank of Queensland said that the deal is expected to deliver material scale, broadly doubling the retail bank and providing geographic diversification. It will bring together two complementary brands, with shared customer-centric cultures and differentiated customer segments. Management believe that there is a clear pathway to a combined cloud-based digital retail bank technology platform.
BOQ trading update
The bank also gave a trading update, saying that it’s on track for a strong first half. It’s expecting to announce first half statutory net profit growth of 60% to 65% and cash net profit growth of 8% to 10%. The net interest margin (NIM) is expected to be around 3 basis points higher compared to the second half of FY20.
Summary thoughts
This seems like a really good update by BOQ. The acquisition seems well priced (for BOQ) and the bank has a big cost saving plan for the combined entity. BOQ does appear to have good prospects of taking on the big four banks if the deal is done. However, I’m not sure if the banking sector is good value right now unless interest rates are about to rise.
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