Talk about timing.
On the same day that its new rival in New England announced it was expanding into Pennsylvania, Sovereign Bancorp of Wyomissing, Pa., said it too was beefing up in its own backyard.
Sovereign, which has spent the last year establishing itself in Massachusetts, Rhode Island, Connecticut, and New Hampshire, announced Tuesday that it is buying $1.5 billion-asset Main Street Bancorp in neighboring Reading for $170 million in stock and cash. With the deal, $34 billion-asset Sovereign would gain 42 branches in eastern Pennsylvania.
Meanwhile, Citizens Financial Group Inc., a Providence, R.I., unit of Royal Bank of Scotland, announced Tuesday that it was entering Sovereign's home market by purchasing Mellon Financial Corp.'s retail operations.
A deal between Citizens and Pittsburgh-based Mellon had been rumored for nearly two weeks, though Jay Sidhu, Sovereign's president and chief executive officer, downplayed any link between Citizens' expansion and Sovereign's decision to buy Main Street.
Sovereign approached Main Street "about a week ago," and Main Street "wanted to talk seriously immediately," he said. "Our strategy is really to be the No. 1 or 2 player in all of our markets, and as it turned out this deal is in our home market."
Still, when asked about the sale price, Mr. Sidhu made it a point to compare Sovereign's deal for Main Street with Citizens' for the 345 Mellon branches. While Citizens would pay a 16% premium on the Mellon deposits, Sovereign would pay a 6% premium for Main Street's.
"It's a terrific deal for Sovereign, and what we are paying for Main Street is a much better deal than what Citizens is paying for Mellon," he said.
Analysts say that Main Street's price - about two times book value - would be no bargain, but that it would be a good deal for Sovereign because of the expected cost savings.
"This is a relatively small deal, but to an extent it gives Sovereign an additional presence in its home state and a well-incremented commercial banking unit," said James Ackor, an analyst at Tucker Anthony Sutro in Portland, Maine. "So it makes fairly good strategic sense, even if they paid full price."
The Main Street deal, which is scheduled to close in the first quarter, is the first for Sovereign since it bought 284 branches from FleetBoston Financial Corp. in March 2000. Mr. Sidhu said that since those branches are doing well, Sovereign decided recently to look at growth in another market.
Main Street Bank's branches would become branches of Sovereign Bank. Though there is overlap in Berks County, where both companies are headquartered, Mr. Sidhu said he did not expect any branch closings. The deal would give Sovereign the biggest market share in Berks County and the second-biggest in Schuylkill County.
Brian Hartline, Main Street's president and CEO, has dealt with Sovereign before; he was chief financial officer at ML Bancorp in Villanova when Sovereign acquired it in 1998.
In an interview Tuesday, Mr. Hartline, who took the helm at Main Street about a year ago, said that at that time he was not looking to sell the company, but rather to turn it around. Main Street suffered severe losses in 1999 and 2000 and had just signed a memorandum of understanding with regulators.
But Sovereign's price was right, and its products and services would benefit Main Street's growing small-business unit, he said.
"From the board's perspective, we were turning things around with a brand new strategy plan serving the small-business market," Mr. Hartline said. "But we are a public company, and when the board evaluated this opportunity, they found it to be the best thing for the shareholders."
Richard D. Weiss, an analyst with Janney Montgomery Scott LLC in Philadelphia, said that he had expected Mr. Hartline to follow through with his plan, and so he was surprised by the deal's timing.
"Main Street had a long-term plan to increase franchise value, but when someone comes in with this kind of offer, how are you going to say no?" Mr. Weiss said. "I think he did his job."
Main Street's shareholders would receive $16.10 in stock and cash for each of their shares. Consequently, its stock soared 42.6% in Tuesday's very heavy trading, to close at $15.33. Sovereign's stock fell .31%, to $12.88.
