C&S/Sovran Forced to Play A Weak Hand
If C&S/Sovran Corp.'s directors don't want to make a trip to the altar with NCNB Corp., what options do they have? The answer, in short, is not very many.
Unlike in 1989, when it rejected an NCNB overture out of hand, C&S/Sovran finds itself with limited leverage. Mounting problem loans have left the company weakened and its shareholders disgruntled.
C&S/Sovran, jointly based in Atlanta and Richmond, Va., has two options - neither of which is particularly appealing:
* It could walk away from the negotiating table and try to ride out its current problems, hoping for a turnaround several years hence. But that would cause C&S/Sovran shares to plummet, riling the shareholders.
* Or it could seek another suitor, either to avoid the clutches of its regional rival or to drive up the price. But, because of legal and regulatory issues, this option is a long shot.
Shareholders with the Jitters
Even if they accept an NCNB bid, C&S/Sovran directors could incur shareholder wrath.
Because of adverse tax consequences, NCNB might offer no more than 0.85 share for each share of C&S/Sovran. At Monday's price, that would amount to about $30.70 a share - well below the $39 it offered two years ago for Citizens & Southern Corp., the much smaller predecessor of C&S/Sovran.
Unless the tax concerns are overcome, the only way C&S/Sovran shareholders might get a bigger price from NCNB is if its stock runs up - which is obviously out of NCNB's control.
|In a Tight Box'
All of this underscores the reality that the C&S/Sovran board is hardly operating from a position of strength in its negotiations with NCNB, based in Charlotte, N.C.
"They're sort of in a tight box," said Cheryl Swaim, banking analyst with Oppenheimer & Co. in New York.
C&S/Sovran could try to go it alone, of course, but that would be a tough road to travel. Its six-state franchise is one of the industry's best. But a continuing hemorrhage from bad loans could leave C&S/Sovran with insufficient capital to exploit that franchise.
Without a deal, C&S/Sovran's stock would probably fall back to about $19 a share, where it was trading before NCNB's approaches became public on June 27. That would leave shareholders even more disgruntled than before. (C&S/Sovran was trading at $24.125 on Monday afternoon.)
The company no doubt wishes that other suitors were available to bid against NCNB, but can probably expect no help from that quarter. None of the other southeastern superregionals are considered financially capable of paying $4 billion or more for C&S/Sovran, which has $49 billion in assets.
Strong companies from outside the region, such as Bank-America Corp., San Francisco, and Banc One Corp., Columbus, Ohio, could be attracted by C&S/Sovran's sprawling six-state franchise. But they are barred from the region by interstate banking restrictions.
A bill moving through Congress would end those barriers, but the provision would not take effect for three years.
That means a suitor would have to take a so-called "stake-out" position in the bank, with the intent of completing a purchase when interstate banking barriers fall. Weighing against that scenario is the troubled history of stakeout agreements. Most have been allowed to lapse when conditions changed and the suitor lost interest.
A while knight could appear in the form of a well-capitalized foreign bank. That possibility raises some big questions: Are they interested in swallowing the nation's 12th-largest banking company? And would the regulators let them do it?
Several big foreign banks - including Canadian Imperial Bank of Commerce, Royal Bank of Canada, Paris-based Credit Lyonnais, and Australia's Westpac Banking Corp. - have stated in recent months that they are interested in acquiring a large U.S. institution with a retail and middle-market franchise. But none expressed interest in C&S.
"It's a wonderful franchise, but it's too large for our appetite, said Anthony J. Walton, a director and chief general manager of Westpac's Americas and Europe group in New York.
A spokeswoman for Credit Lyonnais in Paris similarly denied any interest in C&S/Sovran. Officials at Canadian Imperial and Royal Bank declined to comment.
There are no legal restrictions to prevent a foreign bank from acquiring C&S/Sovran, but that's doesn't mean one would automatically get the green light.
"There would be political as well as policy concerns about allowing a major U.S. bank to be acquired by a foreign institution," said an official with the Office of the Comptroller of the Currency, who declined to be identified.
"Presuming they met the capital requirements, it would still be a difficult call," added a Federal Reserve official.
"I would have trouble finding anyone out there in Foreign Bank Land who has the combination of resources and immediate interest in doing something like that," said Raphael Soifer, a banking analyst with Brown Brothers Harriman & Co. in New York. "Never say never, but it would be a long shot."
That would leave NCNB, which also raises questions.
The paramount one is price: How much can NCNB offer?
Mark Alpert, banking analyst with Bear Stearns in New York, estimates that NCNB can offer no more than 0.85 share. "At that point, [NCNB] would be issuing more shares to C&S/Sovran shareholders than are currently outstanding at NCNB."
C&S/Sovran has 136 million shares outstanding, compared with 115 million at NCNB. Mr. Alpert believes that NCNB's Texas tax-loss carryforwards, which also shelter its southeastern earnings, might be jeopardized if C&S/Sovran shareholders ended owning more than 50% of the merged company's stock.
NCNB declined to comment, but a source close to the company said the impact of the tax problem was not yet clear. Even above the 0.85 exchange, this source said, the tax-loss carryforwards may only be deferred - rather than lost altogether.
An even greater restraining influence on NCNB's offer, the source said, may result from a review of C&S/Sovran's books. C&S/Sovran currently has $1.1 billion in reported nonperforming assets. NCNB could discover that the problem is even worse than it appears.
In any case, nobody on Wall Street believes C&S/Sovran shareholders would receive anywhere near the premium that C&S - by itself - was offered in 1989. "Whatever they get is going to be evaluated in the light of what they could have gotten two years ago. And that's going to make it doubly bad," said Nancy Bush, banking analyst with Brown Brothers Harriman in New York.