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With wild swings in the stock market, negotiations over protections form big changes in the stock values of buyers and sellers are bogging down an already slow deals market.
August 19
Two things on Aug. 10 made First Niagara Financial Group Inc.'s $1 billion deal for HSBC Holdings PLC's branches look increasingly risky: Stocks plunged, and HSBC agreed to sell a huge batch of credit cards to another bank.
Capital One Financial Corp., the buyer of the $30 billion in credit cards, won from the London conglomerate more favorable deal financing terms than First Niagara negotiated. Both institutions must raise capital to fund their purchases. That means tapping the rocky equity markets.
HSBC said it would let Capital One pay for part its deal in stock if it has trouble raising cash. First Niagara got no such concession in its deal for 195 HSBC branches in New York and Connecticut.
That lack of buyer's protection for First Niagara has gotten a lot of attention from analysts and investors worried that the company may have finally over-reached with its latest ambitious acquisition. They are fretting over how it will finance a deal critics say could now be less financially rewarding than the company initially projected, given the sharp fall in its share price.
Buffalo-based First Niagara was down 18%, to $10.04, mid-day Monday for the month of August. Capital One, of McLean, Va., was down 13%, to $41.50, and the KBW Bank Index was down 22% for the month.
Matthew Kelley, an analyst with Sterne Agee & Leach Inc., said First Niagara could use the extra comfort of paying for some of its deal in stock. Capital One can pay for part of its $2.6 billion purchase by issuing up to $750 million of its shares to HSBC at $39.23 per share. (Under that scenario, HSBC says it would sell the shares when "appropriate" based on market conditions.)
A similar financing provision for First Niagara would have given the market "some certainty" given "troubles in the public markets," Kelley said. "The price [of First Niagara stock] is down hard," he added. "With the shares trading at this level the deal will not be that accretive."
It is too soon to say whether the transaction could fall through on financing issues. Both Capital One and First Niagara have until the middle of next year to tap the markets and close their deals. Volatility does not last forever.
As it stands, First Niagara's purchase could be less lucrative to shareholders in terms of earnings per share. When the deal was announced on July 30, Kelley had estimated that First Niagara would have to issue 69 million shares at $12 a share to raise $800 million common equity. Now he is projecting an issuance of 83 million shares at $10 per share.
The more shares issued, the less accretive the transaction. First Niagara had initially said it expected the purchase to boost earnings by as much as 12% in 2013, a projection Kelley said it may have to revise sharply downward.
The branches would be a boon for First Niagara, analysts say. Paying for them is the issue. It also has to sell as many as 100 locations for anti-competitive issues, another headache. Financing flexibility could have made closing the transaction easier.
HSBC's branches are First Niagara's fourth big purchase in three years. It got more favorable terms in at least two of other deals. When it agreed to buy 57 branches in Pennsylvania from PNC Financial Services Group Inc. in 2009, PNC had agreed to buy up to $150 million in First Niagara debt and equity should it have financing trouble. First Niagara raised money without PNC's help. First Niagara also had a right to walk away from its purchase of Harleysville National Corp. outside of Philadelphia in July 2009 if Harleysville's problem loan levels had soared.
Why did it not get better terms from HSBC?
Experts said the auction for HSBC's branches was more heated than the sales process for the credit cards. M&T Bank Corp. and KeyCorp were among the suitors for the branches. Fewer banks could or want to buy a big batch of credit cards. Citigroup Inc., for one, has been trying to shop a large batch of credit cards for two years.
The demand difference is reflected in price: Capital One is paying a relatively low premium for the credit cards. First Niagara is paying a relatively high premium for the branches.
HSBC and Capital One declined to comment. First Niagara did not return a call for comment.
