Was Westpac’s acquisition a mistake?

Does the acquisition reflect a limited growth outlook?

Some analysts have expressed their confusion regarding Westpac’s (ASX: WBC) acquisition of  Lloyds Banking Group’s Australian businesses last week, which it won in a bidding war with Macquarie Group (ASX: MQG).

The bank paid $1.45 billion for Lloyds’ Capital Finance and BOS International, which included a motor vehicle finance book worth $3.9 billion and a $1.6 billion corporate loan portfolio. Whilst Westpac advised that the deal could add $100 million in cash earnings by full year 2015, analysts believe that it lacks capability and growth prospects.

Whilst it wasn’t a bad acquisition in that it provides an opportunity for earnings growth in an otherwise limited-growth environment, it was valued at 20 times full-year 2014 earnings and 15 times 2015 earnings.

John Buonaccorsi, an analyst for CIMB, believes that the acquisition of Lloyds’ assets will lessen the likelihood of the bank following ANZ (ASX: ANZ) or NAB (ASX: NAB) to enter into any acquisitions in Asia in the medium term. This is disappointing news for shareholders, given the growth prospects boasted by the emerging continent.

Meanwhile, Deutsche Bank analyst James Freeman suggested the acquisition reflected “management’s growth outlook must be relatively low to have bothered… With little strategic advantage, and given the price was hardly compelling, we question what a deal that adds only 1 per cent to earnings and is return-on-equity neutral says about management’s outlook for the future growth,” as quoted by The Australian.

Whilst the Australian Competition and Consumer Commission (ACCC) will review the acquisition to ensure it does not dramatically reduce competition levels in the market, Westpac could yet be forced to divest from some of the assets included in the package deal.

Foolish takeaway

Shares in ANZ are significantly more appealing than in Westpac currently, given their more enticing growth prospects. However, at current prices, none of the banks present as good buying opportunities and it would be well worth looking elsewhere.

For instance, you could discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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