Canada's BMO buying U.S. M&I bank for $4.1 billion
Bank of Montreal
Canada's No. 4 bank said on Friday the deal adds to its position in the U.S. Midwest and more than doubles the branch network it runs through its Chicago-based Harris Bank unit.
BMO will issue about C$800 million ($792 million) in new shares to help fund the acquisition. That news helped drive BMO shares down 6.5 percent to C$58.00 on the Toronto Stock Exchange. Shares of M&I rose 18.3 percent to $6.85 in New York.
The $4 billion is not only a significant premium to the share price of the target, but there is likely to be some further capital that needs to be added to the asset, so that makes it even more pricey, said Juliette John, lead manager of the C$494 million Bissett Dividend Income Fund in Calgary.
M&I's shares are valued at $7.75 under the deal, which is a 33.9 percent premium on Thursday's market close.
John called the purchase price fully valued, but added that a weaker BMO stock price presents a buying opportunity.
BMO will also purchase M&I's Troubled Asset Relief Program preferred shares at par plus accrued interest, with full repayment to the U.S. Treasury before the deal closes. It will also buy existing M&I warrants held by the U.S. Treasury.
The bank owed $1.7 billion to the government under TARP, a federal program to shore up financial institutions hit by the global financial crisis. BMO has accounted for $4.7 billion in expected future losses on M&I's loan portfolio.
David Cockfield, who oversees about C$300 million at MacNicol & Associates Asset Management Inc, said BMO's expected earnings dilution from the share issue was at least partly to blame for the slump in its stock price.
We're not rushing out and selling our (BMO) stock, he said. We basically consider BMO one of the better banks and surely they would have researched this one five ways 'till Sunday given the situation south of the border.
MORE U.S. DEALS LIKELY
Canadian banks emerged from the global financial crisis in much better shape than many rivals and have been seeking growth opportunities abroad. The United States, with its still-fragile banking sector, is a key target. With the U.S. economy slowly recovering, deals may not come as cheaply as they did in the immediate aftermath of the financial crisis.
R. Scott Siefers, a managing director at Sandler O'Neill and Partners, estimated that M&I closed Thursday at about 0.73 percent of its tangible book value, and had risen to about 0.86 percent by late morning on Friday.
Even for certain stressed names out there, there's now the idea of optionality or an exit strategy at a premium. This is the first big bank deal we've seen in a while, and it's not a take-under, he said.
Bank investors saw M&I's sale as a positive sign for troubled banks in general by suggesting that other lenders could sell themselves at a premium. Shares of Synovus Financial Corp
Jeff Davis, bank analyst at boutique bank Guggenheim Partners, said U.S. financial sector deals are likely to pick up in 2011 unless the economy slides back into recession.
There are a lot of banks that are so severely challenged from an asset-quality perspective ... that their ability to earn their way back to robustness is unlikely, he said.
BMO'S U.S. PRESENCE GROWS
Milwaukee-based M&I is Wisconsin's biggest bank, and the deal would create the 15th-largest banking group by assets in the United States, BMO said.
M&I has 374 branches and about $52 billion in assets. BMO has 321 U.S. branches and $110 billion in U.S. assets.
In addition to more than doubling BMO's U.S. branch network, the deal doubles its customer base in personal and commercial banking, gives it a position in additional U.S. cities and builds up its U.S. wealth management business.
BMO said it should generate annual cost savings of about C$250 million by the end of fiscal 2013.
John said the deal seemed like a good one from a strategic point of view, but that with serious integration issues ahead, only time will tell if it truly adds long-term value.
M&I has not turned a profit since the third quarter of 2008, after suffering from an ill-timed foray into areas like Las Vegas and Phoenix.
According data from Deutsche Bank analysts, M&I has far more commercial real estate and construction loans on its books than most of its peers, in percentage terms.
CANADIAN BANKS ACTIVE IN M&A
Canadian banks, dubbed the strongest in the world in a Bank of International Settlements report, have been active global buyers.
Recent moves include Royal Bank of Canada
The appetite is there to acquire and we'll likely see more deals, but not in the same size as this one, John said.
BMO Capital Markets and JPMorgan Securities LLC acted as financial advisers to BMO, and Sullivan and Cromwell LLP and Osler Hoskin & Harcourt LLP acted as its legal advisers. BofA Merrill Lynch acted as financial advisor to M&I. Wachtell, Lipton, Rosen & Katz and Godfrey & Kahn acted as legal advisors to the Board of Directors of M&I.
(Additional reporting by Pav Jordan, Maria Aspan, and Dan Wilchins; Editing by Frank McGurty, Janet Guttsman and Peter Galloway)
© Copyright Thomson Reuters 2024. All rights reserved.