stake in the $25 billion-asset thrift company as it sells $300 million of equity to help finance its acquisition of 268 commercial banking branches being spun off by FleetBoston Financial Corp.
Sovereign, based in Wyomissing, Pa., has agreed to pay $1.4 billion for the branches and inject $500 million of capital into the New England unit.
The thrift company originally planned to issue $700 million in stock and $700 million in bonds. But then, because of regulatory pressure, it had to raise an additional $500 million to capitalize the branches, analysts said.
Under the new plan Sovereign would issue $300 million in stock, $700 million of senior debt and $250 million in convertible trust-preferred securities. The thrift also would rely on a $500 million syndicated loan to make up the difference, financing that Jay Sidhu, its president and chief executive officer, had said would be expensive.
On Monday, sources said that the trust-preferred securities and senior notes would price after the market's close. Sources said trust-preferreds would price between 6.75% and 7% yield, with a premium of 8% to 22%, and that the senior notes would price between 10% and 11% coupon.
The original projections were made on the basis of Sovereign's stock selling at $10 a share, the then-prevailing price. Since then the price has plummeted about 20%, to about $8 a share.
With $300 million raised at $8 a share, the deal would add another 37.5 million shares to Sovereign's existing 84 million. Had it tried to raise $700 million at the same price, existing shareholders would have been left with only 52% of the company.
The exact pricing of the equity offering, expected after the market's close Monday, was not available before press time. But observers expected the deal to price in the $8 range, given the stock's close at $8.03125 on Monday.
Stocks in public offerings usually are offered at a discount to the existing price, but an analyst said that because Sovereign already is so low, lead manager Lehman Brothers probably could price the deal near market. "The stock has been pretty beaten up already," said David Winton, an analyst at Keefe, Bruyette & Woods Inc. "The discount is already there."
The mix of equity and debt led Duff & Phelps Credit Rating Co. last week to place Sovereign on watch for a possible downgrade because "projected capital levels are not adequate to support the current ratings." The firm said it expects to downgrade Sovereign and its bank and capital trust subsidiaries one notch when the deal closes in April.
While investors expect Sovereign to conclude the acquisition next April, they question whether the thrift can generate enough earnings to justify the price. That has been reflected in the company's closing stock price Monday of $8.03125, far below the $11 it was trading at after the thrift announced the deal in September.
"On a P/E basis, the stock looks compelling," said Dan Goldfarb, a sector manager for David L. Babson Co. "It's cheap. However the cheapness on an earnings basis reflects the lack of tangible equity and therefore protection to shareholders in case the New England economy is not as robust as Sovereign and its underwriters expect it to be."
Mr. Goldfarb, whose company owns 500,000 shares of Sovereign stock, said he would not buy any of the new equity offered. Much would depend on the New England economy, he said. "I think Jay can pull it off," Mr. Goldfarb said. Mr. Winton said, "If the economy gets into trouble, given the high leverage here, the stock could really be hurt."
While some are skeptical of Sovereign's ability to make the acquisition of the FleetBoston bank branches accretive, the stock has dropped in recent months to a point where value investors may see opportunity. Sovereign has an earnings multiple of seven times 12-month trailing earnings.
Mr. Sidhu's challenge has been to convince Wall Street that it can generate earnings fast enough to justify the price of the acquisition and replenish the company's depleted capital ratios after the deal is completed.
"That is Jay's whole spin -- generating earnings at a very rapid rate," Mr. Goldfarb said. But to do that, Mr. Goldfarb said, is to assume the company will be able to generate robust earnings in a highly competitive New England market.
