Shock to Nedcor as price of BoE merger balloons.

Posted On Friday, 25 July 2003 02:00 Published by
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Banking group under-budgeted' the costs
Financial Services Correspondent

 NEDCOR played down a 22% increase in the cost of completing its merger with BoE, saying that it was ahead of schedule in completing the process.

 The banking group bought the ailing BoE in March last year for R7,5bn, setting the stage for the largest merger in the sector in over a decade and creating SA's largest bank.

 In October, Nedcor said it expected to save R606m a year from the benefits of streamlining operations, but it would also incur costs of R710m to weld the various parts including BoE, Cape of Good Hope Bank and Nedcor Investment Bank into the new-look Nedcor.

 Yesterday, Nedcor said it would now have to spend R868m to bed down the merger R158m more than it had initially projected.

 Although Nedcor initially planned to spend R225m this financial year on bedding down the merger, it will now have to spend R436m this year.

 But Nedcor divisional director John Bestbier, who is leading the merger , said: "One must remember that the costs are once-off, but the synergies will benefit us in perpetuity."

 CE Richard Laubscher said that "in a lot of areas we are ahead of the game".

 Bestbier said Nedcor expected the merger to be "85% complete" by 2004, suggesting it may beat its own deadline of completing the complicated process by the end of 2005.

 Because of the unexpectedly rapid pace , Bestbier said Nedcor will be able to realise R293m in synergy savings for this current financial year more than three times its initial forecast of R90m.

 Nedcor is due to release its half-year financial results on Tuesday. They are expected to reflect both the increase in merger costs as well as the greater savings alluded to by Bestbier .

 Of the R436m in costs, it will have to absorb this financial year, R133m will be reflected in next week's interim results.

 But it will also show merger savings of R62m at the half year more than initially expected due to the pace of the merger. But analysts say earnings expectations will have to be pared back to accommodate the increased costs.

 JP Morgan analyst Jacques Badenhorst said it appeared that Nedcor "under-budgeted" for the cost of the merger but this may be offset to some extent by realising the synergies benefits earlier.

 "The fact that the costs have risen is a negative, especially as this is only six months into the merger.

 "With at least another two years left before the merger is complete, it is still clearly early days in determining whether the merger will be successful or not," said Badenhorst.

 Morgan Stanley's London-based analyst Farid Khan said that the extra costs come at a bad time for the group.

 "While this is not huge in terms of Nedcor's overall income, it's already a pretty tough year for the bank so additional expenses will hurt them now more than ever," he said.

 RMB Asset Management portfolio manager Royce Long said the financial impact of the merger would become clearer when the financial results were released next week.

 With regard to the extra R158m in costs, Long said that "one must be sympathetic to their earlier estimates, given the sheer complexity of doing a merger this size and the forecasting risk they took in making the earlier statements".      

    Jul 24 2003 07:49:00:000AM Rob Rose Business Day 1st Edition

Publisher: Business Day
Source: Business Day

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