Fifth Third Bancorp continued its post-holiday shopping spree by agreeing Wednesday to buy CitFed Bancorp for $688 million in stock. It was the Cincinnati banking company's third in-state deal in less than a month.
The combination would make Fifth Third the market leader in deposits in Dayton, Ohio, where CitFed is based, but at an eye-popping price for a thrift.
Based on Tuesday's closing stock prices, Fifth Third is paying a 43% premium for CitFed, or 3.4 times its recent book value and 28.1 times the company's 1997 earnings.
Stockholders are to get 0.67 of a Fifth Third share for each CitFed share. The Dayton thrift has 36 branches and $3.3 billion of assets. The deal is expected to close in the second quarter.
Currently, Banc One Corp. is the market leader in Dayton, the state's fourth-largest metropolitan area, with a population of 850,000. CitFed now has the third-largest share in Dayton; Fifth Third, the fourth-largest, according to Sheshunoff Information Services.
The purchase price for CitFed is similar to the 3.3 times book that Fifth Third agreed on Jan. 5 to pay for State Savings Co., a thrift in Columbus, Ohio, that had that city's fourth-largest deposit share. Just before Christmas, the banking company said it would buy the Ohio Co., a small brokerage house, for an undisclosed amount.
While analysts acknowledged that Fifth Third paid a lot to get CitFed, they said the highly regarded Cincinnati company, whose stock trades at an industry-high 27 times earnings, is about the only one that could pull off such a deal without raising eyebrows on Wall Street.
"This merger is not dilutive to Fifth Third stock, and it shows they're building one hell of a franchise in Ohio," said analyst Michael A. Plodwick of Lehman Brothers, who has long touted Fifth Third's stock. "This bank can afford to do things most can't."
Fifth Third's chief executive and president, George A. Schaefer Jr., said the pending acquisition of CitFed "presents tremendous opportunities" in the Dayton area, a market the bank entered in 1982.
"This merger will allow us to now provide even greater access to our complete retail, commercial, investment, and data processing products and services," he said in a press release.
Jeffrey Davis, an analyst at NatCity Investments, Indianapolis, said CitFed had been aggressively cutting costs lately while building its mortgage banking business. The company was well-regarded by investors before the merger announcement, trading at about 18 times earnings-higher than many commercial banks.
The thrift's earnings have grown rapidly in recent years. For the quarter ended Sept. 30, CitFed reported earnings of 52 cents per share, nearly double the 28 cents reported for the quarter two years earlier.
For CitFed shareholders, accepting Fifth Third's stock is something of a gamble. Because Fifth Third trades at such a big multiple, it is considered an unlikely takeover target. That means CitFed shareholders are unlikely to "double dip," or benefit from Fifth Third's selling to another bank at a hefty premium to market price.
Nevertheless, investors appeared excited about the prospect of a CitFed- Fifth Third combination, bidding up CitFed's shares $11.375, to $49.625. Fifth Third's stock fell $4.50, to $76.
Analysts said they thought Fifth Third's recent deals were a sign that the much talked of bank consolidation movement in the Midwest is at full blast.
Some said they expect Fifth Third to use its highly valued stock to make a very big deal soon, and others said the prices that CitFed and State Savings have agreed to in recent weeks would spur other bank and thrift executives sitting on the fence to sell.
"At these prices, how can you refuse?" asked Mr. Davis.
