First Union Corp. raised the ante on Virginia acquisitions and may have set a new standard for bank-buyout premiums by offering 3.5 times book value for Signet Banking Corp. of Richmond.
The $3.25 billion stock deal, announced Monday, would create the largest banking organization in Virginia, stealing thunder from two agreements that First Union's North Carolina-based rival, Wachovia Corp., signed last month.
The larger of Wachovia's two targets, Central Fidelity Banks Inc. of Richmond, cost $2.3 billion, a then stratospheric 2.99 times book value.
"I just kept stacking billion-dollar bills on the table till Mac said yes," said First Union chairman Edward E. Crutchfield of his negotiations with Signet chairman Malcolm S. McDonald.
The levity underscored the fact that the book-value ratio raised eyebrows on Wall Street. Analyst R. Harold Schroeder of Keefe, Bruyette & Woods Inc. said flatly, "They overpaid."
John W. Coffey, a Robinson-Humphrey Co. analyst, said, "On the surface it looked very full priced. But when you see that First Union should be able to double Signet's earnings within a year, the price is much more reasonable."
First Union said it expects to cut Signet's annual expenses by half, or $242 million, while increasing product and service revenues by $37 million.
The transaction, which is expected to close by Dec. 31, would result in a $135 million charge to after-tax earnings in the fourth quarter, First Union said, adding that Signet would be adding to earnings per share next year.
Mr. Crutchfield stressed the scale and efficiency benefits, as the $143 billion-asset First Union would rise from fourth to first in Virginia market share. Wachovia, on the strength of Central Fidelity and Jefferson Bankshares of Charlottesvile, had temporarily laid claim to the No. 1 position.
The latest deal would also make First Union second to NationsBank, the largest of the North Carolina-based superregionals, in Maryland and the District of Columbia.
The top First Union and Signet executives began discussing their merger only about three weeks ago, and a recalcitrant Mr. McDonald was soon won over. "It's an opportunity to join together with a great company," the Signet chief executive officer said Monday. "And the price was right."
But Mr. Schroeder, the Keefe Bruyette analyst, said, "It's just extremely pricey for a struggling franchise. I'm questioning the estimates at this point."
In recent years, $12 billion-asset Signet has lagged the double-digit earnings growth reported by many of its peers, as it wrestled with bloated expenses and stagnant revenues.
Seven weeks ago Signet's management unveiled details of a massive restructuring designed to cut expenses by $58 million through closing or selling 20% of the company's branches and eliminating 1,100 of its 4,400 workers.
The company intended to scale back its brick-and-mortar network in favor of a national, direct-mail-based marketing program.that would allow Signet to grow independently.
The deal with First Union puts those plans on hold. Signet said it would take the 39 branches it had earmarked for sale off the market to allow First Union to reevaluate the situation. The future of the national sales program is also unclear.
Roughly half of First Union's 210 Virginia-area branches are located within two miles of a Signet branch.
"There is a large overlap," said Mr. McDonald, who is to become First Union's chairman and CEO for Virginia, Maryland, and Washington. "There will be a significant number of branches closed."
The deal, which will be accounted for as a pooling of interests, calls for First Union to exchange 0.55 share of its common stock for each one of Signet. Taking into account First Union's planned July 31 stock split, the exchange ratio is 1.10 shares. Based on First Union's closing stock price on July 18, the transaction is valued at about $53.59 per Signet share.