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Rural Bank's suitor was kept in the dark

Bendigo Bank's branch network was a deciding factor in the private deal. Bendigo Bank's branch network was a deciding factor in the private deal.
The Victorian government sold Rural Finance Corporation to Bendigo and Adelaide Bank for $1.8 billion in an exclusive privately negotiated deal despite knowing other banks were interested in buying Rural Finance if it was put up for sale.

One of them, Rabobank Australia & New Zealand, initially briefed the Victorian Department of Premier and Cabinet about its interest in buying Rural Finance when the Brumby Labor government was in power.

In a presentation led by Rabobank Australia and New Zealand chairman Bill Gurry, it expressed willingness to protect and grow the franchise if it was sold. After the election of the Coalition state government in 2010 it contacted the department again and confirmed its interest.

The Dutch group is one of the most highly rated banks in the world, and a specialist rural financier. It earned €2 billion ($3 billion) last year on assets totalling €674 billion. In Australia it lifted cash earnings by 17 per cent to $140.3 million and finished the year with retained earnings of $1.1 billion and balance sheet assets of $15.3 billion.

The government and its adviser, JPMorgan, did not tell Bendigo and Adelaide Bank that it was in an exclusive negotiation for a sale by treaty and Victorian Treasurer Michael O'Brien has defended the sale price and the terms of the deal. He says they ensure that Rural Finance continues and expands as its 11 shop-fronts are supplemented by Bendigo and Adelaide Bank's branch network.

The fact that at least one other potential buyer was in the wings (and in the dark) raises questions about the government's decision to negotiate exclusively.

The government announced the $1.8 billion sale of Rural Finance on Monday this week, a day before O'Brien handed down the Victorian budget. The sale was the result of a ''comprehensive review and a market process'', O'Brien said. There would be no forced redundancies and ''non-commercial'' programs run by Rural Finance including a Young Farmers' finance scheme would continue.

The government may have achieved similar structural outcomes with a more open sales process, however, and without an open tender it is impossible to determine whether it has extracted the best price.

O'Brien said this week that JPMorgan's advice was that a sale by private treaty was ''the better way to go'' and took into account issues including the likely sale price, continuity for the business and the risk that Rural Finance customers would be lured away by competitors during a longer, public auction.

The deal was done quickly. JPMorgan is believed to have been appointed around February this year. A standard advisory report would, however, have still included several options for addressing multiple goals - including the government's desire for a quick result, its desire that Rural Finance be protected, the need to get the best sale price and the need to run a fair process.

An exclusive deal would conclude soonest but would create uncertainty about the sale price and the process. That is what has occurred.

Option 2, an open tender, would have given certainty about the sale price but have taken longer. It would have run beyond this week's pre-election Victorian budget, which included a profit of about $400 million on the fast-track, exclusive deal that was done.

A limited tender would have sat between those options, on execution speed, fairness and sale price certainty. Rabobank and Bendigo and Adelaide Bank would have been bidders. Bank of Queensland might have been another. Government concerns that Rural Finance's business would be allowed to evaporate inside one of the big four banks could have been dealt with by either excluding them or, better, imposing conditions on the eventual buyer.

It is the client, the Victorian government in this case, that finally decides which option to pick up.

Labor's shadow treasurer in Victoria, Tim Pallas, went after the deal on Friday. He claimed that JPMorgan was conflicted because it had advised Bendigo and Adelaide Bank in the past and because a shelf company, JPMorgan Nominees, owns about 10 per cent of the bank's issued capital.

The nominee company is a post-box for other shareholders, however. It's a standard banking industry service for overseas shareholders, institutions mainly.

JPMorgan also says it has not provided investment banking advice to Bendigo and Adelaide Bank for more than a year.

Still, the deal needs scrutiny. Michael O'Brien says his department has confirmed that the highest standards of probity were in place but why was a wider auction not conducted? Was politics a factor? Was the government indulging in industry and state planning? If so, was the fact that Rabobank is a Dutch bank headquartered in this country, in Sydney, relevant?

Author :Malcolm Maiden
Source : Sydney Morning Herald



Last modified onTuesday, 13 May 2014 03:42

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