BB&Ts Big Deal Good Sign for Larger M&A

BB&T's agreement to buy Susquehanna Bancshares could be additional proof bankers are growing more comfortable navigating the new regulatory environment.

The $187 billion-asset BB&T said Wednesday that it would buy the $18.6 billion-asset Susquehanna in a $2.5 billion deal that would make BB&T one of the biggest banks in Pennsylvania and boost its profile in Maryland.

Though BB&T reentered the M&A fray in September by agreeing to buy the $1.9-asset Bank of Kentucky, its latest purchase is large enough to make some read the tea leaves for bigger deals, chief among them is Kelly King, the Winston-Salem, N.C., company's chairman and chief executive.

"This hopefully means that we're beginning to get back to a normal environment where combinations that make sense can be pursued and will likely be approved," King said in an interview.

"Of course, we need to get this one approved," he added. "There've been a lot of changes in regulation. … It is a new world. We're all trying to figure it out, and our view is that things are finally settling down and M&A needs to be a part of this new world."

The cash-and-stock deal follows two sizable acquisitions last week that would create a pair of banks with roughly $10 billion in assets, a key regulatory threshold created by the Dodd-Frank Act. While those deals are mere fractions of BB&T's size, King said they all speak to an emerging trend: The fear of regulation is subsiding and bankers are beginning to act.

Of course, that doesn't mean that there will be a wave of big deals. Though King asserted that he is not trying to be a trailblazer, BB&T remains one of the few larger banks that appear to be cleared by regulators to participate in M&A — for now.

"For a nanosecond, it felt like the 1990s again," said Mike Mayo, an analyst at CLSA. "It felt like another time. Then you realize there are not as many potential buyers. I don't take this to mean consolidation is back."

At most, there could be a handful of larger deals annually for the foreseeable future, said Frank Cicero, global head of the financial institutions investment banking at Jefferies.

"From a regulatory standpoint, there are just not enough regionals that are confident enough to fuel a wave," Cicero said. "But this certainly doesn't hurt activity, and it could be a catalyst for more deals."

For BB&T, the availability of sellers is also an issue. Those who follow the company were not shocked by the size of the transaction, but they were surprised by the geography. Most expected King to strike deals in higher-growth areas like Florida and Texas, or perhaps Tennessee.

King made it clear during the interview and a conference call with analysts that his top preference is for organic growth, followed by in-market acquisitions and, finally, deals in contiguous markets. In-market deals simply aren't available, he said.

"You know, my dad used to say you have to fish on the side of the boat where the fish are," King said in an interview. "If there were in-market potential deals that were actionable, we would have done that before we did a contiguous expansion. But those deals aren't available. Maybe they will be at some point, but we can't make things happen."

There was an element to buying Susquehanna, based in Lititz, Pa., that "seems to be a bit reachy for BBT," Ken Usdin, an analyst at Jefferies, wrote in a note to clients.

The geographic move also left Mayo a bit perplexed.

"I liked his comment about his dad's fishing advice, but I wonder if they were fishing for striper and caught a stingray," Mayo said. "I'm surprised they went north — did the compass get misaligned?"

Geography notwithstanding, several analysts, including Mayo, said the deal makes strategic sense for BB&T.

"You have a more-optimized bank buying a less-optimized one," Mayo said, noting that BB&T's efficiency ratio is 60%, compared to 65% at Susquehanna. "BB&T is one-tenth more efficient. That is the way consolidation should unfold."

BB&T said it plans to eliminate roughly a third of Susquehanna's annual operating expenses after the deal is complete. The acquisition is expected to close in the second half of next year.

Regarding top-line growth, BB&T should be able "to generate more revenue from Susquehanna's platform than the seller could do on its own," said Sameer Gokhale, an analyst at Janney Montgomery Scott.

BB&T's ability to build on Susquehanna's platform helped seal the deal for William J. Reuter, the seller's chairman and chief executive. "No matter what size bank you are these days, there are a lot of issues related to the increased operating costs — not just regulatory costs, either," he said in an interview.

"You need more size and scale," Reuter added. "We're not getting much help from top-line revenue growth, and there's only so much maneuvering you can do from the expense side."

Susquehanna has been a prolific buyer in its own right, completing 32 acquisitions over 32 years, Reuter said, adding that the company's sale to BB&T was a negotiated transaction.

"The job of any CEO is to always be looking for people who you can buy and people who could be looking at you," Reuter said. "We weren't particularly interested in selling, but all the stars lined up."