Fleet Financial to pay $125 million in stock for Sterling Bancshares.

After losing the bidding wars for two thrifts in central Masschusetts, Fleet Financial Group is planning to buy Sterling Bancshares, a $1 billion thrift company in Boston's affluent western suburbs.

New England's largest banking company said Monday it would pay $125 million in stock for Sterling, a Waltham-based thrift with 13 branches in Middlesex County. The price tag represents a hefty 1.87 times Sterling's book value.

Analysts applauded the deal, saying the price was justified by Sterling's clean balance sheet and strong management. Sterling's nonperformers represent less than 1% of its total balance sheet and its culture is closer to that of a commercial bank than to a thrift.

|No Hidden Warts'

"There is nothing wrong with this bank," said Jeffrey L. Cohn, an analyst at H.C. Wainwright & Co. in Boston. "There are no hidden warts here."

The stock of Sterling Bancshares soared $5.75 on the over-the-counter market Monday to $36.25. Fleet, which is based in Providence, R.I., lost 12.5 cents to close at $34 on the New York Stock Exchange.

Fleet's willingness to pay top dollar for the thrift also reflects its determination to build its market share in the rapidly consolidating Massachusetts banking market.

Fleet, which soared to prominence in the region when it won the failed Bank of New England Corp. in 1991, recently lost the bidding for two thrifts in Worcester, Mass., to its largest rivals.

A |Quality Franchise'

Bank of Boston Corp. last month agreed to pay $276 million in cash, or about 1.7 times book value, for BankWorcester Corp. Shawmut National Corp. in August said it would pay $180 million in stock, or 1.76 times book, for Peoples Bancorp of Worcester.

Despite paying an even higher multiple, Fleet cut a better deal for Sterling than its competitors did for their Worcester County thrifts, asserted Eugene McQuade, Fleet's chief financial officer.

"The quality of this franchise is so superior [to BankWorcester and Peoples Bancorp]," Mr. McQuade said in a phone interview. "Our deal is a little cheaper than those."

Fleet expects to shave 60% from Sterling's annual expenses, Mr. McQuade said. The transaction, which is expected to close in the spring of 1994, will not be dilutive to shareholders and accretive to earnings in 1995, he said.

Sterling's Middlesex County location is seen as a major asset for Fleet. The county, which is larger than all of Rhode Island, is one of the most attractive in New England because of its large population and high number of businesses, observers said.

Sterling Bancshares is the dominant financial institution in the cities of Waltham and Woburn - two of the county's biggest business centers.

When the acquisition is complete, Fleet will have 35 branches and about 4.7% of deposits in the fragmented Middlesex banking market, giving it the fourth-largest share.

Commercial Banking Bent

Market leader BayBanks Inc. has a 22.4% share, followed by Bank of Boston and Shawmut, which each have an approximate 7% share.

Analysts said Sterling will be a good mate for Fleet because of its commercial banking bent. John C. Warren, the Thrift's president, chief executive, and chairman, is a Shawmut veteran who has aggressively pursued commercial and industrial lending opportunities.

"Their lending portfolio has grown quite nicely," said Mr. Cohn, the H.C. Wainwright analyst.

Other Deals Called Impetus

In an interview Monday, Mr. Warren said he was moved to sell Sterling after witnessing the Bank Worcester and Peoples Bancorp deals. "They were the first significant acquisitions of a premier franchise to be done for a superior price," he said.

Sterling will be folded into Fleet Bank of Massachussetts N.A. Officials at Fleet and Sterling said it had not yet been determined which Sterling executives would remain with the bank after the acquisition.

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