Canadian banks are making it clear that, from their vantage point, the border with the U.S. is all but mythical.
On Friday, Bank of Montreal, the fourth largest of Canada's five dominant banks, said it's buying Marshall & Ilsley Corp., a midwest regional institution with $54 billion in assets, in an all-stock $4.1 billion deal, a 35% premium. M&I, Wisconsin's largest, has 374 branches and a presence stretching from Las Vegas to Florida. Bank of Montreal is already the number three lender in Chicago via its Harris Bank unit; the deal will about double its U.S. deposit base to $92 billion.
In a conference call with analysts on Friday, William Downe, the president and chief executive of Toronto-based BMO, described the deal as a "transaction that came together quickly" and one that "crystallizes BMO's strategy of expanding our North American footprint."
M&I this fall notched its eighth-straight quarterly loss as revenue fell; a drop in its loan-loss reserve wasn't enough to lift it into the black. It has seen its results improve of late, though not as much as some other banks.
Since 2007, M&I has lost $4.8 billion, largely on bad home construction loans in Florida and Arizona.
BMO says it expects the company to lose an additional $4.7 billion.
BMO, however, has the financial strength to write down the portfolio ahead of those losses, which means the "transaction economics are attractive," Chief Risk Officer Thomas E. Flynn said in the conference call.
The deal values M&I at 1.26 times its annual revenue and has a price-to-book ratio of 0.61% for M&I, which Flynn described as "attractive multiples."
BMO will issue additional equity before the deal closes, and plans to pay the U.S. government some $1.7 billion to end the M&I's participation in the Troubled Asset Relief Program.
The deal is also BMO's second foray into the U.S. this year, coming after it picked up Amcore Bank NA in a government-assisted acquisition. It's not alone; Toronto-Dominion Bank has been an aggressive acquirer both before and after the financial crisis, moving into the down-at-heel Florida market.
Andrew Marquardt and Doug Johnson, analysts at Evercore Partners, wrote the deal is "quite expensive for BMO … based on normalized earnings power." As such, they said, it constitutes the "likely best outcome" for M&I's shareholders.
The analysts noted the deal gave credence to the idea that foreign buyers are, despite the financial crisis, "clearly taking [a] serious look at U.S. banks." But, they said, "it's a negative for other potential Midwest take-out candidates, as a large potential buyer is now likely on the sidelines for a period of time."
