Canada's two largest banks announced early Tuesday they are spending almost $11-billion (U.S.) to expand in the United States and the Caribbean, riding on the wings of the soaring Canadian dollar.
With the loonie now at or above par with the greenback for the first time in more than 30 years, No. 2-ranked Toronto-Dominion Bank stole the show by announcing its biggest acquisition to date: a deal to double its U.S. retail banking presence by taking over Commerce Bancorp Inc. for $8.5-billion in cash and stock — a transaction made possible in part by regulatory problems that led to the ouster of the New Jersey bank's founder at the end of July.
The news of TD's planned acquisition overshadowed confirmation from No. 1-ranked Royal Bank of Canada that it is buying Trinidad & Tobago's RBTT Financial Holdings Ltd. for $2.2-billion, in one of the largest recent acquisitions in the Caribbean.
But observers say there is little question that the high-flying loonie will make both deals easier for the acquiring banks to swallow.
“I'm quite sure that had a lot to do with the transactions,” said Neil Andrew, associated portfolio manager at Leeward Hedge Funds in Toronto. “It's certainly very timely.”
“TD has very aggressively taken advantage of the low U.S. dollar, and the valuation discounts that the U.S. financials have been trading on,” analyst John Aiken at Dundee Securities in Toronto told clients in a note, adding in all capital letters for emphasis that he “would not be surprised to see other Canadian financial institutions make large acquisitions in the U.S. in the near term.”
As well, unlike many of their U.S. counterparts, Canadian banks have so far suffered little in the way of collateral damage from the global credit squeeze triggered by the meltdown of the U.S. subprime mortgage market, and analyst Brad Smith at Blackmont Capital in Toronto said it was only a matter of time before they moved to take advantage of the situation.
“The [TD] deal is consistent with our belief that domestic banks would be tempted to use the current credit market disruption to extend their U.S.-centric retail banking strategies,” he said in a note to clients Tuesday.
Based in Cherry Hill, N.J., Commerce Bank has about 2.4 million customers, 460 branches and 700 automated banking machines throughout New Jersey, New York, Connecticut, Delaware, Washington D.C., Virginia, Maryland and Southeast Florida, TD said Tuesday morning. It also has about $48-billion in assets, $44-billion in deposits and 15,000 employees.
“Acquiring Commerce Bank offers a singularly unique and compelling opportunity for our shareholders — one that is both a strategic fit and a superior value creation opportunity through accelerated organic growth,” TD Chief Executive Officer Ed Clark said in a news release, calling the acquisition a “singularly unique and compelling opportunity” for TD shareholders.
“The combination of Commerce with TD Banknorth doubles the scale of our U.S. banking business and accelerates our transformation to a leading North American financial institution.”
Assuming a sweeter competing bid for the U.S. bank does not knock TD out of the game, the deal still must be approved by regulators and Commerce Bank's shareholders.
The proposed acquisition comes about three years after TD broke into U.S. retail banking with the $3.8-billion acquisition of Banknorth Group Inc. of Portland, Me. Since renamed TD Banknorth, it now has more than $40-billion in assets and about 600 branches and 700-plus ABMs in Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, and Vermont. TD also owns 40 per cent of U.S. online brokerage TD Ameritrade.
The Commerce Bancorp deal also comes about two months after CEO Vernon Hill II, a powerful figure in New Jersey business and politics, was forced to step down by the board of directors. This came after he fell afoul of bank regulators for awarding tens of millions of dollars in contracts, including $50-million to his wife to redecorate the bank's branches.
Gerard Cassidy, a U.S. bank analyst in Portland with RBC Capital Markets, said Commerce Bank would not have been sold without Mr. Hill's departure.
“Absolutely not,” he said in a telephone interview. “Vernon Hill was going to be with this bank for a very long time if it wasn't for his untimely exit this past summer when the regulators pushed him out. This man lived and breathed Commerce Bancorp.”
TD said the purchase price for translates to $42 a share for the U.S. bank. Payment will consist of $10.50 in cash and 0.4142 of a TD share for each Commerce Bancorp share.
That's a premium of just 5.7 per cent to the $39.74 at which Commerce Bank's shares closed Monday — up 96 cents or 2.5 per cent — on the New York Stock Exchange, having hit a 52-week high of $39.97 during the session.
However, Mr. Cassidy said a takeover premium has been built into the U.S. bank's shares since shortly Mr. Hill's departure, as analysts and investors speculated it would not remain independent for long. The price has risen to current levels from just over $33 in early August.
He also said the small additional premium in the TD deal reflects the difficult the Canadian bank likely faces in integrating Commerce Bank's operations into those of TD Banknorth, whose own integration has been problematic.
“The integration is going to be difficult because of the culture of Commerce,” he said. “It is a culture of enthusiasm and sales, with the customer always being right. Plus, they provided a level of customer service that was very costly.”
Characterized by such things as seven-day-a-week service, and paying top dollar for the best and most convenient locations, the service level has left Commerce Bank with a level of profitability among the lowest of the top 50 U.S. banks, Mr. Cassidy said.
Still, like Mr. Andrew at Leeward, he agreed the Canadian dollar's strength will help lighten TD's load. “That certainly helps the transaction, there's no doubt about it,” he said.
TD shares, meanwhile, were down $2.88 (Canadian) to $73.50 on the Toronto Stock Exchange.
The bank, Canada's second largest by stock market capitalization ($52.7-billion) and assets ($404-billion) said that adding Commerce Bank to its empire would give it a total of more than 2,000 branches in the United States and Canada and approximately one-quarter of a trillion dollars in deposits. This, it added, would make it the seventh-largest bank in North America as measured by branch locations.
Commerce Bank chairman Dennis DiFlorio said in the news release that “joining forces with TD ... opens the door to tremendous new growth opportunities.”
TD Banknorth CEO Bharat Masrani, meanwhile, said the acquisition will “give us scale in the Mid-Atlantic and will allow us to turbo-charge our organize growth strategy.”
TD said Mr. DiFlorio, along with Commerce Bank's new CEO Bob Falese will continue to run the U.S. bank and report to Mr. Masrani.
Assuming it receives all the necessary approvals, TD expects the deal to close next March or April. It said that once the purchase is completed, it will take a one-time restructuring charge of about $490-million (U.S.) before taxes.
TD also indicated that the acquisition will not be profitable immediately, saying it will likely reduce profit by 28 cents a share in fiscal 2008 and by 22 cents in 2009 on the basis of generally accepted accounting principles. On an “adjusted” basis, this will translated into a 10 cent reduction in 2008 and break-even the next year, the bank said.
Commerce Bank, meanwhile, expects to take an after-tax charge of $150-million (U.S.) related to the planned sale of a portion of its fixed-rate investment securities portfolio, which it is undertaking to reduce its exposure to interest rate changes.
It also said it has agreed, following closing, to negotiate the sale of its Commerce Banc Insurance Services Inc. to the unit's chairman and CEO George Norcross III.
Commerce Bank reported a profit of $154.8-million or 79 cents a share on revenue of $1.01-billion in the six months ended June 30. This compared with a year-earlier profit of $156.8-million or 82 cents a share on revenue of $900.8-million.
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