On Thursday morning, the rumored sale of Flint, Michigan-based Citizens Republic Bancorp (CRBC) became a reality when Akron, Ohio-based FirstMerit Corporation (FMER) announced that it would acquire CRBC. Based on the fixed exchange ratio of 1.37 FMER shares per CRBC share in the 100% stock deal, the transaction has a reported value of $22.50 per share, or $912 million in aggregate, using the prior ten-day average closing price for FMER. FMER's price dropped 11.25% on the day the deal was announced, reducing the nominal value of the deal to $20.87 per share.
The reported deal value per share equates to a 1.26x multiple of CRBC's Q2 2012 tangible book value per share ("TBV-PS") of $17.84, and 13.4x my $1.68 EPS estimate for CRBC, which assumed full taxes, a normalized loan loss provision, and no retirement of CRBC's TARP preferred equity. FMER plans to repay this TARP preferred, but with funding to come from a mix of new preferred stock and subordinated debt, with terms as yet unknown, it is difficult to forecast the "post-repayment" EPS number. Lastly, CRBC shareholders are receiving an 11% premium over CRBC's prior ten-day average closing price.
In the article I published about CRBC on August 10th, I estimated CRBC's stand-alone value at $18 per share, assuming a retirement of the TARP preferred. The same analysis yields a value estimate of $17 per share without such retirement. I also suggested that the realization of 20% synergies could potentially create $11 per share of additional value, to be shared, perhaps equally, between buyer and seller shareholders. FMER expects to realize synergies equating to 22% of CRBC's non-interest expense. I mentioned that, with an overhead expense/average assets ("OH/AA") ratio in Q2 2012 of 2.81%, CRBC ran lean, and therefore realizing 20% synergies might be tough. At 3.03%, FMER's OH/AA ratio in Q2 2012 was higher than CRBC's. Furthermore, this deal has relatively little geographical overlap. FMER currently has no branches in Michigan, and CRBC's Ohio deposits are only 5% of total deposits. Both points call into question the likelihood of 22% synergies being realized, but that doesn't matter. Based upon the announced deal value, FMER needs to realize $4.50 per share of synergies for the deal to be break-even to its shareholders. FMER shouldn't have trouble beating this by a healthy margin, to the benefit of both sets of shareholders. I'm pleasantly surprised.
Given that Comerica (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares (HBAN), KeyCorp (KEY) and PNC Financial (PNC) had all been rumored to potentially have interest in acquiring CRBC, according to an article in SNL Financial, I'm surprised that FMER prevailed at the price it did. Other potential acquirers could have expected to realize greater synergies, and some had a P/E multiple advantage over FMER. With $14.6 billion of assets at Q2 2012, FMER is much smaller than the other banks on this list. The next smallest bank is HBAN, with $57 billion in assets, and the largest is PNC, with $300 billion in assets. CRBC has $9.7 billion in assets, making it 66% as large as FMER on this basis. It's rare that you see a bank do such a large acquisition. But I'm not as concerned as I would be over this if the deal were "priced to perfection".
So on August 27th, M&T Bank Corporation (MTB) announced a reasonably-priced $3.8 billion acquisition of Hudson City Bancorp (HCBK), and now we have a sensibly priced $912 million acquisition. Are sellers becoming more rational while buyers are developing discipline? It's been nearly five years since there's been a robust level of bank M&A activity, but the combination of those two factors could lead to a slew of sensible, acquirer-positive deals. Here's hoping that rationality is contagious.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.