Kina Bank taking over Westpac PNG, Fiji operations

Kina Bank is set to take over Westpac operations in PNG and Fiji. Chief executive officer GREG PAWSON talks about the acquisition and how this falls into the banks strategic plans. Business reporter DALE LUMA writes

ANOTHER exciting milestone for Kina Bank and one that is aligned to its existing 2025 strategic plan, providing an even stronger platform for growth in the future is the acquisition of Westpac, expected to be completed next year, according to the bank.
“It’s also one of the brighter opportunities in the context of the Covid-19 pandemic because we have managed to navigate this with strong resilience and little impact to the underlying performance of the business,” chief executive officer Greg Pawson told The National.
“We’ve been able to negotiate an acquisition that is financially viable, more so achievable and very beneficial to stakeholders.
“The transaction ultimately provides us with more scale and a bigger presence in PNG with geographical coverage extending to Fiji.
“The deal is structured to ensure we maintain a strong capital base.
“Kina’s vision is about becoming a world class diversified investment bank proudly domiciled in PNG – a nation that has considerable opportunities for economic prosperity.
“We were established in 1985 as a small diversified financial services company.
“Now dual listed on the Australian stock exchange (ASX) and PNG stock exchange (PNGX), we’re governed to the extremely high standards you would expect.
“Our diverse shareholders span Australasia and include some of the largest investment funds in the region. Our shareholder registry is published in our annual report, available on our website and the ASX.
“We have been able to demonstrate good, consistent organic growth since the Maybank acquisition in 2015.
“We successfully completed and integrated the acquisition of ANZ PNG’s retail, SME and commercial business in 2019 and restructured our shareholding with the divestment of our founder Fu Shan who sold their entire stake in our business.
“We also acquired a 15 per cent stake in MiBank to help develop financial inclusion in PNG.
“Despite the challenges presented by the Covid-19, 2020 has been extremely successful.
“We’ve delivered a number of market firsts, such as driving e-government; making our internet payment gateway available to ATM cardholders.
“We launched a major new customer service proposition called prime, which comes with a fee-free visa card and PNG’s lowest fixed rate home loan.
“And we’ve announced a series of digital partnerships to bring more innovation to the market, such as a foreign exchange platform that will be available to everyone across PNG, no matter who they bank with.
“We are now well positioned to take the next step to strengthen our position in our home market and at the same time extend our reach and operations offshore to Fiji. Geographical diversification at this point in our journey is a good thing.
“It gives us considerable optionality for the way we develop and structure our operations and technology in the future.
“We see this as a key driver of the forward growth and efficiency of the organisation.
“The Westpac acquisition is in essence turn-key in that we will assume management from the date of completion.
“There is no complex customer migration or transitional services arrangements required given that we are buying the businesses as going concerns inclusive of the infrastructure.
“Westpac runs the Pacific more or less autonomously making the separation relatively easy.
“So, the acquisition process will be very different from our acquisition of ANZ PNG.
“This means branches will continue to operate as they do today.
“There will be no impact on a customer’s experience or on their accounts.
“We have committed to no branch closures and no loss of jobs, so there will be no change to the faces you see.
“We are working collaboratively with Westpac to ensure that the transition is completed smoothly and with as little disruption to customers as possible.”

Acquisition Highlights:

• Strong strategic fit and alignment with Kina’s 2025 strategy to become a leading full service regional bank in the Pacific with a market leading digital platform;
• Based on pro-forma June 30, 2020, consolidated financials, the acquisition is expected to be accretive on completion and will restore earnings per share to levels above those prior to the recent capital raising in October 2020;
• This accretion is estimated without any consideration of synergies;
• The integration of Kina and Westpac’s Pacific businesses is expected to deliver material synergies to be realised in the year ending December 2022;
• Completion of the acquisition is subject to regulatory (including competition) approval in both PNG and Fiji and is expected to complete by Sept 30, 2021;
• Purchase price of up to AU$420 million (K1.036b) including AU$315 million (K822.2m) payable on completion and AU$60 million (K156.6m) payable in AU$20 million (K52.2mil) six-monthly instalments after completion and up to AU$45 million (K117.45mil) of future earn-outs to be paid annually over the 24 months following completion, subject to business performance hurdles based on actual performance of the Fiji business;
• The acquisition will be funded through a combination of existing cash reserves, cash flow from ordinary operations, retained earnings in the PNG business being paid to Westpac, tier two subordinated debt instruments and potential equity investment from a number of strategic investors; and,
• It is not proposed that there will be any changes to the board or senior management as part of, or in connection with, the acquisition.

The Acquisition
Kina has entered into the definitive agreements to acquire:

• Westpac 89.91 per cent interest in Westpac Bank PNG Limited; and,
• Westpac branch operations and employees in Fiji (Westpac’s Fiji operations are a branch of Westpac Banking Corporation).

Acquisition Price:
Kina Bank has entered into definitive agreements to acquire Westpac’s interest in the Pacific Businesses for up to AU$420 million (K1.036bil), including AU$60 million (K156.6mil) payable in three AU$20 million (K52.2mil) six-monthly instalments after completion, and up to AU$45 million (K117.45mil) of future earn-outs to be paid annually over the 24 months following completion, subject to business performance hurdles based on actual performance of the Fiji business.
Kina paid a deposit of AU$42 million (K110mil) upon execution of the definitive agreements.
The purchase price equates to 0.79 times book value of the Pacific Businesses of Westpac as of June.
The purchase price comprises:

• AU$315 million (K822.2mil) in cash being;
• AU$42 million (K110mil) deposit paid, plus;
• AU$273 million (K712.7mil) on completion.
• AU$60 million (K156.6mil) of retained earnings in the PNG business being paid to Westpac in AU$20 million (K52.2mil) six-monthly instalments after completion; and,
• Up to AU$45 million (K117.45mil) earn-out from the Fijian business in two annual instalments over the 24 months following completion, subject to business performance hurdles based on actual performance of the Fiji business between June 30, 2020, and June 30, 2021, and between June 30, 2021 and June 30, 2022.

It is anticipated that the balance of the purchase price (AU$273 million) payable on completion, will be funded by a combination of:

• Existing cash reserves (approx. AU$58 million (K151.37mil) being AU$100 million (K260.99mil) as at Dec 7, 2020 less the deposit paid);
• Cash flow from ordinary operations; and,
• Investment from strategic investors including multilateral development banks via tier two subordinated debt facilities and placement of equity.

To facilitate an anticipated placement of equity, it is the company’s current intention to seek shareholder approval at a meeting to be held on June 30, 2021:
a) Pursuant to ASX listing rule 7.1 and PNGX Listing Rule 7.1, for the placement of 23,671,857 fully paid ordinary shares at an issue price of AU$0.80 (K1.97) per share, under the (i) placement to institutional investors and the institutional component of the 1 for 2 accelerated pro-rata non-renounceable entitlement offer, as announced on Sept 14, 2020; and (II) the offer to eligible PNG shareholders, as announced on Nov 11, 2020 (“placement”);
b) pursuant to ASX listing rule 7.1A and PNGX listing rule 7.1A to issue equity securities equivalent to an additional 10 per cent of the number of ordinary securities on issue over a 12-month period after the AGM (“10 per cent placement facility”); and,
c) For the issue of the balance (if any) of equity securities required to be issued to fund the balance of the cash component of the purchase price.
If approved by shareholders, it is anticipated that the placement of equity will be made by Sept 30, 2021, prior to completion.

Completion
Completion of the acquisition, which is expected by Sept 30, 2021, is conditional on securing regulatory approval in both PNG and Fiji. The process to secure the approvals in PNG and Fiji has commenced.

Integration
Kina and Westpac are developing a comprehensive separation plan timed around the prerequisite regulatory approvals.
There will be no complex migration of customer information across platforms as the core banking infrastructure and associated information communication technology is being acquired.
One of the key features of the acquisition is that it is “turn-key” and Kina will assume ownership and operation of the Pacific Businesses effective from the completion date with no required transitional services agreements.