Toronto-Dominion Bank's $13.4 billion agreement to buy First Horizon raises a number of questions, foremost among them being: Is its timetable realistic?
Analysts on Monday pressed the Canadian bank to explain its decision to test U.S. regulators, who are in the middle of tightening their reviews of big-bank M&A deals.
Under
TD Chief Executive Bharat Masrani addressed the relatively narrow window and the potential that the purchase price will rise.
“There have been instances where some deals have been slightly delayed, so this would compensate First Horizon shareholders should there be a delay of that nature,” Masrani said during a call with analysts. “But our expectation is this will close and get approved around the nine-month mark.”
Given that several large deals faced delays in 2021, and took longer than nine months to close because of added regulatory scrutiny and staffing shortages at the Federal Reserve, the extra 65 cents “is highly likely,” said Chris Marinac, the director of research at Janney Montgomery Scott.
The potential economic fallout from Russia’s invasion of Ukraine only added to the questions about the time necessary for approval.
The Russian invasion — and the economic and financial uncertainty it is now causing — is bound to complicate the regulatory approval, Marinac said.
“The Fed was already dragging its feet on deals, and now you have this conflict. I think it could distract regulators in unforeseen ways, if anything,” he said.
TD insisted the conflict in Europe did not undermine its confidence in the deal as it finalized details in recent days.
“The answer is no,” a TD Bank spokesperson said when asked if the geopolitical crisis gave either side pause.
If the two sides get the deal across the finish line, the payoff could be worth it. TD would have $614 billion of assets, and could stretch its bulked-up commercial and retail banking units in growing markets such as Dallas and Atlanta while expanding its presence in Florida and the Carolinas.
First Horizon stands to benefit from the Fed’s looming interest rate hikes, which could boost its bottom line while the deal is under review. The Tennessee bank has estimated that a gradual 100-basis-point increase to the Fed’s main borrowing rate would net the company upwards of $80 million in added net interest income.
“That ought to be a tide that lifts our profitability this year and into next,” First Horizon President and CEO Bryan Jordan said on the call with analysts Monday.
The acquisition would mark the end of an era for Tennessee banking.
First Horizon is the state’s oldest continuously operating bank, according to Federal Deposit Insurance Corp. data, and has been the largest bank based in Tennessee since 2005, when hometown rival Union Planters Bank was bought by Regions Financial.
First Horizon was founded as the First National Bank of Memphis in 1864 and operated under that name until 1977, when it rebranded as First Tennessee Bank to reflect its statewide expansion.
It changed its name to First Horizon in 2019 after a string of deals across the Southeast extended its footprint well beyond Tennessee’s borders. Its acquisitions of Capital Bank in Raleigh, North Carolina, and IberiaBank in Lafayette, Louisiana, have helped to more than triple its assets over the last four years.
For TD Bank, the acquisition would be its first of a U.S. commercial bank since 2010, when it acquired the $8 billion-asset South Financial Group in Greenville, South Carolina.
Marinac said that, with rising rates looming, it was surprising that First Horizon would sell now.
“I thought they had a lot to do — a lot to gain — over the next couple years just by mining their existing customer base and capitalizing on the changing rate environment,” Marinac said. “But I think that, in addition to a really attractive price, they probably determined that the digitization of the banking industry was more daunting than they ever admitted to publicly.”
Marinac pointed to First Horizon’s 2020
“They were always hesitant to provide much detail about digital, which I think is telling,” Marinac said. “If you are a bank of First Horizon’s size, you have to have your proverbial act together on the data and digital systems, and the jury was still out on that.”
Jordan explained during the call Monday that Hurricane Ida
“The hurricane drove a significantly higher cost associated with the integration due to time,” Jordan said.
If the closing and integration between TD Bank and First Horizon goes smoothly, the company could look to keep up with Canadian rival Bank of Montreal, which recently agreed to buy Bank of the West in San Francisco.
“Together these two businesses will form a very significant commercial banking competitor … not only in our existing footprint but increasingly across the country,” said Leo Salom, head of TD Bank’s U.S. group.
Jacob Thompson, a managing director of investment banking Samco Capital Markets, said the big Canadian banks are flush with cash and eager to deploy it. Steady population growth in the southern United States — including in First Horizon’s footprint — presents TD and its rivals more opportunity for long-term expansion than they are likely to find in Canada over the rest of this decade.
What’s more, he added, buyers are motivated to act now to get ahead of an expected rising rate environment. While TD paid a substantial premium of about 2.1 times First Horizon’s estimated tangible book value, price tags could be notably higher by next year if that increased profitability kicks in over the course of 2022.
“So a continued Canadian push here makes sense, and I wouldn’t be surprised to see another deal like this yet this year,” Thompson said.
Alan Kline contributed to this story.
