Westpac may have to boost $17.6 billion St George bid

Speaking to Australia Broadcasting Corporation (ABC) television on Sunday, Westpac chairman Ted Evans said "never say never" when asked whether the bid would be raised.

Soon after the interview, Westpac issued a statement saying much the same thing: "Westpac considers that it has made a full and fair offer which is compelling both in terms of its price and terms. However, Westpac reserves the right to review its offer if it considers that circumstances warrant this."

Last week, Westpac offered 1.31 of its own shares for every St George share. The offer was accepted by the St George board on Tuesday but speculation has been rife that another bank may start a bidding war.

"These are early days and this is certainly not a done deal," said Craig James, a senior analyst at Commonwealth Securities in Sydney. "It is likely that the National Australia Bank, ANZ and the Commonwealth Bank will show some interest and there will be a fair bit of competition."

The combined entity would have a market capitalization of around A$66 billion ($62.3 billion), overtaking Commonwealth Bank of Australia's A$61 billion. It would rank second to National Australia Bank by asset value.

A battle in the banking industry would run alongside the bid by BHP Billiton Ltd/Plc, the world's largest miner, for rival Rio Tinto Ltd/Plc to create a mining titan. Rio is fighting the takeover.

INTERESTED BANKS

Setting the cat amongst the pigeons, St George Bank's chief executive, Paul Fegan, told the newspaper the Australian in an interview published on Saturday that he expected other local and global banks to monitor the situation and was open to more offers.

"Under the agreement we have with Westpac, we can't shop or talk (with other potential bidders)," he said "But we can answer our telephones. And the phones have been very busy."

Westpac's Evans told the ABC television program his bank had made a good offer but was prepared for counter-offers.

"We made a compelling bid that would see us right through this, not just on price ... It's even more compelling on the operating model we are offering," he said.

"I'd be very surprised if anyone can or would match that," he added.

Evans said Westpac had made an earlier, lower offer that had been rejected. St George needed Westpac to stay competitive, he said.

St George has been struggling with soaring funding costs in the debt markets stemming from the global credit crunch. It disappointed investors by trimming its earnings forecast due to the rise in funding costs.

"St George couldn't afford to continue the way they had been operating in a changed world with the cost of funds compared to us, so the world has changed and it won't go back the way it was," Evans said.

"The funding difference between a AA as Westpac is, and A as St George is, is now quite significant," he added, referring to credit ratings, which help determine funding costs.

Shares in St George fell 0.6 percent on Friday to close at A$33.28 and Westpac gained 0.8 percent to A$24.86, while the overall market was up 0.7 percent.