Continental, 1st Chicago Held Talks on Merger

Continental Bank Corp. and First Chicago Corp. held preliminary merger discussions recently but broke off the talks, according to people familiar with the matter.

The discussions included a meeting late in the summer between Continental's chief executive, Thomas C. Theobald, and his counterpart at First Chicago, Barry F. Sullivan, the sources said.

It was unclear why the discussions were ended or whether they are likely to be resumed.

Could Be 7th-Largest

A marriage of the two Chicago-based companies would form a $73 billion-asset holding company that would rank as the nation's seventh-largest after pending mergers are completed.

A First Chicago spokeswoman, Lisabeth Weiner, declined to comment on the discussions. A Continental spokesman, Kurt Stocker, said he had no knowledge of any meeting between the chief executives.

Mr. Stocker said the company is "not involved and not interested" in talks with First Chicago or any other potential partner.

However, a top officer in a major Southeast banking company said he had been approached within the past two weeks by investment bankers seeking to sell Continental. It was unclear whether the investment bankers had been retained by Continental or were acting on their own.

Mr. Stocker dismissed that report as the act of a competitor seeking to upset Continental's customers by spreading rumors.

The revelation of discussions between Continental, with $24 billion in assets, and First Chicago, with $49.2 billion, comes on the heels of a series of major Midwest bank merger announcements.

In each deal, shareholders of the acquired institutions got generous premiums over their common shares' book values. Monday, for example, Comerica Inc. offered shareholders at Manufacturers National Corp. an exchange valued at roughly $38.75 per share, a 50% premium over book.

Shares at Discount to Book

By contrast, Continental's common shares were trading Tuesday afternoon at $10, a 50% discount from book value. And First Chicago's common shares were trading at $26.50, a 26% discount from book.

Though the two companies have starkly disparate strategies, they are the two biggest institutions headquartered in Chicago. They have in each other the best chance for cost-cutting through consolidation.

What's more, Continental's $185 million third-quarter loss prompted some analysts to question whether the company should try to go it alone. Revenues declined 16% from the second quarter, as problem assets soared 26%, to $973 million, or 7% of gross loans.

While Continental's Tier 1 capital ratio remains at a reasuring 5.5% of risk-adjusted assets, as calculated under 1992 guidelines, "it might not be a bad time for shareholders to get out," said Adam Klauber, a banking analyst at Duff & Phelps Inc., Chicago.

Appetite May Be Lacking

But few banking companies appear to have either the where-withal or the appetite to acquire Continental.

First Chicago, for example, has problems of its own. Third-quarter net chargeoffs of $167 million were double those of the prior-year period. Yet problem assets of $1.44 billion at Sept. 30 still were up 9.2% for the 12 months and comprised a daunting 5.42% of gross loans.

"Wall Street might not support the equity offering that probably would be required for a union between [First Chicago] and Continental," said Mr. Klauber.

A second rumored shopper for Continental is Bank of Montreal. The company already owns Chicago-based Harris Bancorp and has publicly said it wants to acquire another sizable Midwest banking institution.

However, a Canadian banking law restricting pooling-of-interest mergers appears to pose a serious obstacle, according to Felice Gelman, a banking analyst at Dillon, Read & Co., New York.

Bank of Montreal would have to exclude any goodwill booked in a U.S. acquisition from its consolidated Tier 1 capital ratio.

Investor hopes that Continental has completed its laborious and expensive restructuring is putting a floor under the stock price, said Henry Dickson, a banking analyst at Kemper Securities Group, Chicago.

The roughly $1.60 per share Continental hopes to earn in 1992 would be an attractive 16% return at current share prices, he said.

But the wild cards in that scenario are Continental's deteriorating revenues and asset quality, said Ms. Gelman. Devoted almost exclusively to a middle-market commercial clientele whose fortunes are sliding in a soft economy, she said.

PHOTO : Ripe for a Merger?

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