AmSouth Bancorp has drawn new interest from bank investors in recent weeks amid speculation that another big bank merger might be brewing in the Southeast.
But executives at the $47 billion-asset company say they are not interested in selling and believe AmSouth can grow faster alone than as part of a larger company.
Nonetheless, the Birmingham, Ala., company has become more desirable since June 21, when Wachovia Corp. announced it was buying SouthTrust Corp. of Birmingham for $14.3 billion. That deal eliminated one of the region’s most appealing takeover targets and turned attention to other potential sellers.
And despite AmSouth executives’ comments to reporters, an eventual sale would not be a big surprise. In the past year plenty of bankers have scoffed at merger speculation before announcing deals. SouthTrust chairman and chief executive Wallace D. Malone Jr. asserted in a January interview with American Banker that “this company is not for sale, and this company is not talking to anybody,” but soon after negotiated a sale to Wachovia.
AmSouth is “the most attractive acquirable candidate remaining” in the Southeast, said John Pandtle, an analyst with Raymond James Financial of St. Petersburg, Fla. “If you go through the remaining candidates left in the Southeast, and the relative attractiveness of the surviving franchises, the process of elimination brings you to AmSouth.”
Mr. Pandtle rates AmSouth’s shares “outperform,” the second-highest rating on his firm’s 4-point scale.
AmSouth would be attractive on geography alone. Its strategy of growing outside of Alabama in recent years would make it a good catch for any large bank seeking to expand quickly in the Southeast.
After a slew of mergers among the nation’s top 20 banks, AmSouth is No. 18 by assets. It has 660 branches in Alabama, Florida, Tennessee, Georgia, Mississippi and Louisiana; what analysts call a strong sales culture; and a budding investment management business.
AmSouth has one-third of its deposits in Tennessee (it bought First American Corp. of Nashville for $5 billion in 1999) 27% in Alabama, and 23% in Florida. It has been adding branches rapidly in Florida — 31 in 2003, 11 in the first quarter.
AmSouth spokesman Rick Swagler said the company does not comment on merger speculation, but he read this statement: “AmSouth remains committed to its internal growth strategy, opening at least 30 new branches each year in some of the nation’s fastest-growing markets.” AmSouth believes it can win customers on its own amid the “market disruption” of the Wachovia-SouthTrust merger and other recent deals, Mr. Swagler said.
C. Dowd Ritter, AmSouth’s chief executive, has made it clear he thinks AmSouth is better off remaining independent. In investor presentations this spring he touted a three-year plan that AmSouth completed last December and a new one for 2004-2006.
That plan calls for AmSouth to double the contributions from wealth management (currently 12% of profits) and its Florida banking network (where it has more branches than in any other state). It also wants a better balance in profits among its various businesses; right now consumer banking accounts for 57% of earnings and commercial banking 31%.
Mr. Ritter told investors at an Atlanta conference in late May that the board reviews strategic options at least once a year. He said last October, before the directors approved the new three-year plan, that he and” outside advisers” had “presented to the board the value of the company assuming execution of this plan, assuming a sellout, [and] assuming a merger of equals. And frankly, the greatest value to shareholders is executing this plan,” Mr. Ritter said.
Investors may like the CEO’s growth predictions, but for the past year AmSouth’s earnings have stalled amid low interest rates and a sluggish economy. Analysts say it will need to demonstrate progress to avoid being backed into a takeover corner.
Lehman Brothers’ Jason Goldberg said Amsouth’s earnings growth “hasn’t been robust. It has been 44 or 45 cents each of last six quarters, so clearly they need to improve on that.” He rates the stock “underweight.”
Analysts expect AmSouth to show a slight improvement, to 46 cents a share, when it reports second-quarter results Tuesday. The company has said it expects to earn $1.87 to $1.92 for the year, which would be an increase of 6% to 9% from 2003. Some analysts say that could still could lag other regionals.
In the late 1990s, AmSouth’s shares traded at a premium to peer banks, but since the First American deal its price has tended to lag its peers.
It had a setback in 2000 when it announced a major restructuring and an earnings shortfall that it blamed on declining credit quality and rising short-term interest rates. Earnings growth returned but then stagnated in 2003 with the economy.
AmSouth is showing other signs of progress, however. It has trimmed its troublesome syndicated loan portfolio over the past three years and in recent quarters it has been one of the first banks to report signs of a rebound in commercial borrowing.
And despite recent earnings weakness, AmSouth’s shareholder return over the three-year period was 83%, versus an average of 29% for banks in the Standard & Poor’s 500 and a 12% overall decline for the S&P 500.
The question is, will its performance be enough in the medium term to forestall a sale?
A majority of analysts rate AmSouth’s shares “hold.” That is what David Stumpf of A.G. Edwards & Sons and Kevin Fitzsimmons of Sandler O’Neill & Partners gave the stock when they started coverage recently.
In his first report on AmSouth, published Tuesday, Mr. Fitzsimmons said that although it is investing in Florida and Tennessee and has other growth initiatives, “further upside to the shares could be limited over the next 12 months.” Growth is slowing in consumer lending, a sharp decline in credit costs is at an end, and AmSouth has increased balance-sheet risk by adding securities more quickly than its peers.
Mr. Stumpf said in a June 17 report that he likes AmSouth’s healthy 4% dividend yield, against a 2.9% average for other regional banks, and that it is an “attractive franchise” because it is solid in Florida, Tennessee, and Alabama. But he calls its outlook for earnings growth “below average,” partly because of its heavy investment in mortgage-backed securities and the inability to supplement earnings releasing bad loan reserves.
Mr. Pandtle is more optimistic. “A couple of quarters ago, we started seeing an acceleration in core revenue and earnings growth, following fairly lackluster results in prior years,” he said. Earnings growth is being masked by securities gains and other items, he said, but it will be “more visible” in the second half as securities gains shrink to normal levels.
Those growth prospects, along with a relatively lower value compared to other regional banks, make AmSouth a good bet right now, Mr. Pandtle said.
AmSouth’s stock has been hovering around $25 a share recently, which is about 13.4 times Mr. Pandtle’s 2004 earnings estimate of $1.90 per share. Other regional banks nationwide trade at an average P/E ratio of 14.6 times 2004 earnings estimates, he said.
“So on 2004 earnings, that’s an 8% P/E multiple discount,” Mr. Pandtle said. That gives AmSouth a “compelling” valuation, he said.
The discount narrowed somewhat in recent months as investors began speculating that more mergers were afoot in the Southeast.
In the eight trading days after Wachovia and SouthTrust announced their $14.3 billion deal, AmSouth’s shares rose as much as 4.4%. As of Thursday they were still up 1.6%.
Using SouthTrust’s sale as a guide, Mr. Pandtle believes AmSouth could fetch $30 to $35 a share if it were sold, which would be a 20% to 40% premium over its current price.
He names Fifth Third Bancorp of Cincinnati and Wells Fargo & Co. of San Francisco as possible buyers. BB&T Corp. of Winston-Salem, N.C., also could be a fit, and it has been rumored in recent years to be interested in AmSouth.
Citigroup Inc. and Royal Bank of Canada’s RBC Centura Bank of Rocky Mount, N.C., have also been mentioned as potential buyers in the Southeast. Both banks declined to comment Thursday. Roberta Jennings, a spokeswoman for Fifth Third also declined to comment. So did BB&T spokesman Robert Denham. BB&T is a less likely buyer, in part because executives have pledged to limit acquisitions to about 5% of assets per year, or less than $5 billion, which rules out a deal for the $47 billion-asset AmSouth. Wells Fargo spokeswoman Julia Tunis said the company had no comment.
Unlike some other recent dealmakers, AmSouth is under no pressure to sell, analysts say.
Management succession is not an issue, as it was with SouthTrust chief Wallace D. Malone Jr., who at 67 had not named a successor as CEO. Mr. Ritter is 56, and years away from retirement and succession questions.
“Anything is possible,” Lehman’s Mr. Goldberg said. But “it’s up to the company” whether it sells. In most of the recent deals, executives or the company’s board were ready to sell.
