First Union Corp. has agreed to buy Dominion Bankshares for $830.5 million in stock, paying more than expected to make its first major move into Virginia.
Directors of Dominion, which is based in Roanoke, approved First Union's offer of 1.6 times book value late Sunday night. Word of the negotiations had leaked out last week and contributed to a big run-up in the price of Dominion's shares.
A Surprise for Wall Street
The purchase price was 30% higher than Wall Street had foreseen - a surprise, given the sizable amount of bad loans at Dominion.
Still, analysts said the acquisition is important because Virginia is one of the only southern states left for Charlotte, N.C. - based First Union to expand into.
Last week, First Union announced plans to buy Meritor Savings, which also has offices in Virginia. However, analysts said they think First Union may need to make other acquisitions in the state to become a major force.
"Dominion is a nice franchise, but it isn't a major market force," said Thomas Brown, an analyst at Donaldson, Lufkin & Jenrette Securities Corp.
Including Meritor and Dominion First Union would have a 10% deposit share in Virginia, fourth-largest in the state, Analysts speculated that First Union would try to buy another Virginia bank to better compete in the state against rival NationsBank Corp.
Dominion has $8.9 billion in assets an 286 offices, along with sizable mortgage servicing and trust business. Most of its branches are in Virginia, where a growing population and diverse industry make for potentiality profitable banking. The company also has 71 branches in Tennessee, where First Union had one branch and wanted to expand.
"Virginia and Tennessee are the only sizable markets left to First Union," said Richard Brown, head of the financial institutions group at Bankers Trust New York Corp., which advised First Union.
By terms of the agreement, each of Dominion's 38.7 million shares will be exchanged for 0.58 share of First Union. At First Union's closing price of $37 a share, the deal has a value of $21.45 per Dominion share.
Share Price Drops
The surprising premium First Union agreed to pay sparked a selloff in its shares, which fell $1 on the day. This happened despite the company's announcement that earnings for 1992 would be $480 million to $495 million, much higher than Wall Street had expected. Dominion's shares soared $3.25, to $19.625.
The purchase is a gamble by First Union that it can float Dominion out from under a deluge of bad loans. Sour real estate loans have hammered Dominion. While nonperforming assets have been declining for three quarters, they still equaled 6.4% of assets at June 30, among the highest proportions in the industry.
Dominion operates under an agreement with the Office of the Comptroller of the Currency that stipulates it must raise capital and reduce its level of bad assets.
|An Intelligent Gamble'
"I think First Union is taking an intelligent gamble, buying into Dominion before it gains significant momentum for a turnaround in assets," said Bradford M. Johnson, managing director at Sterne, Agree & Leach Inc., an Atlanta-based investment bank.
Typically, a premium of 1.5 times book value is considered reasonable for a company in the early stage of a turnaround. That's what Boatmen's Bancshares paid for Sunwest Financial Services Inc. in New Mexico, which also had high nonperforming assets.
Analysts speculated that, in the case of Dominion, another southern banking company may have been interested in bidding against First Union, driving up the price.
First Union's investor relations officials said the purchase price was reasonable. They said the bad-loan problem has peaked and that Dominion just finished an OCC exam so that surprises in the loan portfolio are unlikely.
Dilution Seen in 1993
First Union expects Dominion to dilute earnings per share in 1993, when the Virginia company will earn $90 million. The acquired company is expected to add to earnings per share in 1994, earning $115 million.
The rise in earnings would come from reductions in the bank's loan-loss provision, in expenses related to foreclosed real estate, and in operating costs. In all, First Union expects to cut Dominion's current annual expense base by up to 25%, or $100 million, by 1994.
Some analysts said that Dominion would earn less than that forecast in 1994 and would continue to be dilutive until 1995.
Investment bankers and analysts have long said that Virginia is ripe for consolidation. With Dominion bought, Crestar Financial and Signet Banking Corp. are the next likely targets. Crestar shares rose $1.50, to $30, and Signet also gained $1.50, to $38.875.Partners at a Glance First Union DominionHeadquarters Charlotte, Roanoke, N.C. Va.CEO Edward E. Walter N. Crutchfield DalhouseAssets $47.7 $8.9 billion billionDeposits $37.0 $7.6 billion billionBranches 940 286ROA * 1.00% 0.81%ROE * 14.75% 13.97%(*) For six months ended June 30Source: Company Reports