Suncorp’s ‘Bendigo option’ not the smoking gun for ACCC

Australia’s competition regulator remains convinced the case exists for a tie-up between Bendigo Bank and Suncorp’s banking arm as a better way forward.

ANZ has been rejected in its $4.9bn bid to buy out Suncorp’s banking arm. Picture: Britta Campion

Australia’s competition regulator remains convinced the case exists for a tie-up between Bendigo Bank and Suncorp’s banking arm as a better way forward than the regional lender being swallowed by a member of the big four.

And it’s prepared to ignore the people who have real skin in the game and don’t want the deal.

Suncorp CEO Steve Johnston pushed back on a merger with Bendigo as a second best option. Picture: John Feder

The ACCC has seized on desktop analysis prepared by Suncorp’s investment bank Barrenjoey in April last year that concluded a merger with Bendigo would be “value accretive” and the second best option behind a tie-up with a big four bank. The problem for the ACCC is that should be seen as one data point to be considered by Suncorp’s board at a moment in time rather than a smoking gun.

It is one of about 20 documents prepared for the Suncorp board. Each one was updated with context and analysis that quickly came to a different view.

When ANZ was approached as a possible buyer, Suncorp’s bankers never picked up the phone to drive a competitive process. One banker involved in the process dismissed the April document as an exercise in examining all options before talks with ANZ commenced.

It is simply not enough to say the entire ANZ case to buy Suncorp falls down on a bankers’ pitch. Barrenjoey later updated its analysis and came to a different view. But the ACCC says it placed less weight on Barrenjoey’s later findings “due to its timing, incomplete methodology, and inconsistencies with earlier documents”.

Bendigo Bank had wanted to merge with Suncorp.

So too evidence provided by Suncorp executives pushing back on the notion of a Bendigo merger is dismissed as self-interest. Suncorp chief executive Steve Johnston in sworn evidence given to the ACCC says “the only relevant alternative is Suncorp Bank remaining part of Suncorp Group”. This is noted by the regulator.

Suncorp chair Christine McLoughlin last year told shareholders at the bank’s annual meeting in October that a deep review of future options for Suncorp’s bank landed at the following options: an all-cash sale to a major bank; to continue with the status quo; or a sale to Bendigo Bank.

The Bendigo option was found to be “inferior to both the ANZ offer and our own organic plan,” McLoughlin said in her speaking notes that were also lodged with the ASX. It is understood the words were chosen deliberately with an eye to rules around disclosure.

Banking myth

For more than two decades the myth of the regional banking roll-up has been passed among regulators and even some bankers.

The story goes that this new force would then be the much-needed slayer of the big four. In its more detailed findings, released late on Monday, the ACCC concludes that combining Suncorp and Bendigo would create “a larger second-tier bank that would be better placed to grow its market share through increased competition and trigger a stronger competitive response from the major banks”.

St George Bank, which was three times the size of Suncorp, was barely regarded as a disrupter and would have been less so had Westpac not moved before funding markets started to wobble.

ANZ chief executive Shayne Elliott. Picture: Josh Woning

Perth’s Bankwest, also bigger than Suncorp, started making waves on the east coast. But its UK-based parent HBOS ran out of cash and needed to be bailed out by the UK taxpayer. Banking is a complex game and there’s more to it than pricing a home loan.

Bendigo’s board and management are right to explore options to get bigger through acquisition. The regional bank also faces the same motivations of ANZ, which is get bigger for the sake of scale. A bigger customer base will help absorb costs and a larger balance sheet would potentially get it a better deal on funding markets. However, that doesn’t mean a merger with Suncorp at any cost.

To push ahead with a deal, Suncorp would have to accept the risk of Bendigo’s shares, given a $4.9bn buyout is too big of a bite. Then there is additional risk of Bendigo needing to fund a bigger balance sheet, setting aside additional capital in a slowing economy. There is the potential for control issues between Suncorp and Bendigo and years of pain in integration risk. It would be all consuming. Bendigo’s shareholders would have a hard time swallowing a merger of equal with Suncorp. None of this is canvassed by the ACCC.

Today, Bendigo’s investors are getting a much better return as technology redraws the banking playing field. Bendigo’s fast-growing digital disrupter bank Up has amassed more than 600,000 customers in just 18 months and through other channels Bendigo today is writing one in four digital loans in Australia.

The ACCC maintains there is a “realistic commercial likelihood” that, should ANZ’s offer not proceed, Bendigo Bank would make an offer to acquire Suncorp Bank “and that such an offer would be considered and accepted by Suncorp Group following negotiations”. That’s even after Suncorp has clearly said no.

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Estia chase

For a sector dogged by decades of failing its core customers, flawed funding models and botched reform, is private equity the answer to aged care?

Virgin Australia-owner and US private equity major Bain Capital, is moving in on a sector that has also failed to shine on public markets, underscoring that there are no quick fixes.

The move on the Gary Weiss-chaired Estia Health comes after Bain was forced to sweeten its initial lowball deal, putting another $63m on the table taking it $838m.

Even with the sector deeply out of favour from investors, Weiss held his ground to extract the better deal.

It was helped with backing from Estia’s biggest single shareholder Wilson Asset Management, which had a nearly 9 per cent stake in the aged care provider and too wanted more.

On Monday, Bain’s local boss Mike Murphy secured endorsement from Weiss and the Estia board for his revised deal.

Chairman of Estia Gary Weiss. Picture: Lyndon Mechielsen

Critically, Wilson Asset Management’s portfolio manager Tobias Yao on Monday also lent support to the $3.20 a share offer.

“Gary (Weiss) and his management team has done an excellent job realising value for shareholders,” Yao told The Australian.

While remaining Estia shareholders are yet to vote, focus remains on how Bain hopes to extract value from one of the biggest aged care operators and in an industry known for its limited investor returns.

Reputational hit

From day one Bain’s Murphy will have to battle against the heavy reputational baggage that comes with private equity. Namely driving down costs; a big payday to managers; heavy debt and fast-financing in order to flip an underperforming asset.

Aged care has high costs baked in and the recent royal commission into the sector declared investors and managers who provide aged care services also need to take responsibility for how services are delivered. And this includes having the right organisational culture and governance arrangements in place.

Former public service commissioner and Medicare chief Lynelle Briggs, who was one of the commissioners, said: “If aged care service providers are not prepared to operate as social enterprises, I am not sure that they should be in the business.”

But the recommendations from the royal commission were also the circuit breaker the sector desperately needed to get a more sustainable funding model in shape. But earnings remain seriously challenged.

The scrapping of the bed licence regime represents a major reform which will lower the barriers of entry for new operators to enter the market. It will also make consolidation easier for bigger players looking to improve scale. The changes mean funding will be offered by places available, rather than regulated demand.

Scale game

For Bain this is a once-in-a-multi-decade opportunity. The changes means Bain can use one of the better run aged care operators as a platform to expand and buy out other operators. From there it becomes a scale game.

Bain will have to tread carefully on the near-term costs game, and from October aged care providers will be required to have increased care for residents including a registered nurse on site.

From October aged care operators will need a registered nurse on site.

Based on the new star rating system, Estia already sits on the upper end of staffing-to-resident ratio, implying it runs on a higher-cost model. However it deserves to carry a premium for higher patient care.

It is also an opportunity for Bain with some smaller operators facing even more pressure on costs expected to exit the market.

Bain has picked its moment for an industry at a cyclical low, particularly coming out of Covid-19, but particularly with a more stable funding model the longer-term outlook is slowly turning positive.

Combined with an ageing population, there is expected to be a sustained increase in demand for aged care over the medium to longer term.

Government still has plenty of work to do overhauling the financing, regulation and governance of the aged care system, but there is a role for patient private capital.

Whether Bain can recast the image of private equity will be known in several years when it is time to make its exit either through a relisting on the ASX as a much larger operator or a sale to big super.

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Originally published as Suncorp’s ‘Bendigo option’ not the smoking gun for ACCC