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St George agrees to merger with Westpac -

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ELEANOR HALL: Westpac has made it over the first hurdle in its bid to become Australia's biggest
and most powerful bank, with St George agreeing to the mega-merger proposal.

If Westpac's $19-billion takeover offer succeeds, St George Bank investors will receive a 28 per
cent premium on their shares.

But the proposed deal must still make it past the Federal Government.

Business editor Peter Ryan has the latest on the deal.

PETER RYAN: Today's agreement between Westpac and St George to the key terms of the mega merger is
just the start of a long and complex process to build an Australian banking goliath.

And for the woman driving the deal - Westpac chief Gail Kelly - it's not just about being the
biggest, but the best.

GAIL KELLY: There are clearly a lot of things working for us here. I think the model itself
mitigates risk. The organisations have similar cultures. We have an excellent knowledge of both
businesses and we have skill and experience in implementation on board. People have done such
integrations before. This is exciting and it is very much an agenda about growth.

PETER RYAN: The proposal is already well underway, and the board of St George will recommend the
offer to shareholders, based on a 28.5 per cent premium to Friday's closing share price or 1.3
Westpac shares for each St George share.

Both sides have signed an agreement clearing a two-week period to examine each other's books and to
negotiate the fine details of the deal.

But an obvious deal breaker is regulatory approval and today Gail Kelly indicated nothing was being
left to chance in winning over the Competition and Consumer Commission.

GAIL KELLY: We have the very best expertise working on this and we have a high degree of confidence
with regard to the success of this transaction from ACCC approval point of view.

Clearly there is an important piece of work yet to be done over the forthcoming months to achieve
that outcome.

PETER RYAN: Another hot issue is the future of branches, ATMs, staff and service levels in a new
super bank with 10 million customers.

Gail Kelly repeated her assurance that the merged networks would be retained.

GAIL KELLY: The intention is to keep the branches. Keep the distribution systems of both and indeed
investing further in those over time and that obviously means keeping and looking after the
customer-facing staff of both of the organisations.

PETER RYAN: While Gail Kelly said that is her intention, she gave no guarantee, noting that
"customer facing staff" would be retained with no mention of those in the critical back office.

They're fine but important details, according to the former chairman of the ACCC Professor Allan
Fels.

ALLAN FELS: This is a very important merger taking the distinctive St George out of the market. It
is true that St George was becoming quite a big player and a reduction of five to four in the
market for big players in itself is serious anyway.

PETER RYAN: Allan Fels is also worried that Westpac's swallowing of St George will create a
dangerous consolidation of the banking sector - that could prompt a scramble for second tier banks
that are weaker because of the credit crisis.

ALLAN FELS: I expect there would be a run on quite a few other banks. They would be looking at
Bendigo Bank, the Bank of Adelaide, the Bank of Queensland, maybe even Suncorp Metway. These would
all be looked at as the big banks seek to match the growth and size of Westpac.

PETER RYAN: And would be the impact on competition if those second tier banks were effectively
absorbed and taken out of business.

ALLAN FELS: I think if most small banks were taken out of competition then there would be some
adverse effects on competition if we just ended up with four big banks only.

PETER RYAN: While St George is Australia's fifth biggest bank, the merger proposal skirts closely
to the four pillars policy - which bans mergers between Australia's big four banks.

The Treasurer Wayne Swan has had little to say so far on the deal.

But his predecessor Peter Costello stepped back into the limelight to say the Four Pillars policy
is not being threatened.

PETER COSTELLO: If the merger were to go ahead, they might get dominance in particular markets and
you would have to satisfy those particular concerns but subject to that, it wouldn't run foul of
the four pillars policy.

PETER RYAN: With the terms of the merger now out in the open, both Westpac and St George came out
of a 24 hour trading halt late this morning.

As expected, St George shares surged 25 per cent while Westpac fell back slightly as investors
gauged the risk and reward of what could become a high stakes banking bonanza.

ELEANOR HALL: Business editor Peter Ryan.