BEN shareholder's bonanza is BOQ's bonfire

Bank of Queensland offered 0.748 shares of its own stock for each Bendigo Bank share plus $5.50 in cash. Based on closing prices for both stocks on the 16th March 2007 the offer amounts to $17.92 per BEN share, a 36% premium to BEN's 16th March closing price. Sound like a juicy deal for BEN shareholders? You bet and it gets even juicier if you bother to look at the numbers.

Notice how the offer is based on share prices without any reference to value. What we need to look at is what BEN and BOQ are actually worth. Firstly BEN, over the last 5 years the bank has averaged a modest 17.5% return on equity, compound average eps growth of 15.7% and paid out just over 70% of earnings as dividends. With $6.19 equity per share and assuming similar returns going forward I value the company at around $9.16 per share.

Turning to BOQ, a 5 year average return on equity of 19.3%, compound average eps growth of 13.8% and an average dividend payout ratio of 74%. With equity per share of $6.48 and assuming similar returns going forward I value BOQ at $11.36 per share. Thus using the offer parameters of 0.748 BOQ shares for every BEN share plus $5.50 in cash values BEN at $14.00 per share a 53% premium to BEN's current value. A generous offer indeed. What does BOQ get in return? All the usual talk about synergy and size are bandied about with the only hard numbers offered up being $70m in cost savings.

There is some doubt about whether the deal will go through. Hopefully for BOQ shareholders it won't whilst with BEN shares closing at $17.10 today, an 87% premium to their current value, BEN shareholders must be thinking Christmas has come early this year.