Regions Financial Corp.'s announcement Thursday that it would acquire AmSouth Bancorp came with a rationale that departed from other recent dealmakers' in the current consolidation wave.
Unlike some recent partners, they are selling their $10 billion agreement almost solely as a way to cut expenses.
C. Dowd Ritter, AmSouth's chief executive, went so far as to explain that selling to an in-market rival for a 2% discount to its $28.90 closing price Wednesday was better than selling to an out-of-market competitor, because the combined companies could cut costs by eliminating overlap.
The partners, whose merger had long been predicted, are both based in Birmingham, Ala.
Mr. Ritter, who would become Regions' CEO, said in an interview: "You see proposed transactions that use higher numbers. We are looking to cut 10% of the combined expense base, which we think is very achievable by spring '08.
The deal, announced Thursday, should also help the merged company become an endgame player, said Mr. Ritter, 58, who is also the chairman and president of the $53 billion-asset AmSouth. "Either company could have been a survivor," he said, but now "we can compete with anyone."
Jackson Moore, 57, the chairman, president and CEO of the $85 billion-asset Regions, had said earlier on a conference call that the deal "provides substantial efficiencies and cost-saving opportunities for the consolidated company." Mr. Moore will be the chairman of the company after the deal closes in the fourth quarter.
The companies expect $700 million in merger-related expenses but expect to reap $400 million in cost savings by 2008.
About half of the savings would come from 3,700 to 4,000 job cuts, or roughly 11% of the combined work force. Approximately 1,500 of those job cuts would result from 150 branch divestitures from a combined network of approximately 2,000 branches in 16 states, where both companies have branches.
The partners expect the combined $138 billion-asset company to shed $2.5 billion of deposits, 2.6% of their total, to win regulatory approval.
Regions' last major transaction was also built around cost savings, but with that deal - its July 2004 acquisition of Memphis-based Union Planters Corp. - it was forced to adjust its cost-cut projections downward. In January 2005 it said it would divert half of its expense savings to spend on new branches, technology, and additional staff.
Regions' CFO, D. Bryan Jordan, said during Thursday's conference call that he expects all of the costs savings this time around to "hit the bottom line."
In a note to analysts, Christopher Marinac at FIG Partners LP wrote that the real challenge will be customer retention. Mr. Marinac also wrote that the company will operate in several slow-growth markets, which might make it difficult to build its business.
Regions drew criticism from analysts after its acquisition of Union Planters began a period of balance-sheet growth that fell behind its peers'.
"We will take our time to do it correctly and make sure we're focused on the customer," Mr. Ritter said in the interview.
Regions has said in recent months that deposit gathering in particular has picked up largely due to accounts it has landed in areas hit by Hurricane Katrina. In late January it said it had brought in more than $1.3 billion in deposits in areas hit by the storm.
AmSouth, despite having nearly a third of its branches in Florida, still has a large concentration of branches in slower-growth markets in Alabama, Mississippi, and rural Tennessee, said Kevin Reynolds of Stanford Financial Group. "Once you get on the other side of this deal you still have a very large slow growth organization," he added.
However, Jefferson Harralson at Keefe, Bruyette & Woods Inc., offered some positive thoughts in a note to clients: "We believe that the deal offers the prospect of significant and achievable cost saves that should provide earnings tailwinds over the short term." He raised his 2007 earnings estimate by a nickel, to $2.80 a share.
However, he added: "We do have some concerns about the possible loss of market share and a possible talent drain from the combined entity. That said, the metrics of the deal are sound."
The deal has been rumored on and off; most recently, talk of negotiations surfaced in November. At that time, AmSouth was still working through an agreement with regulators to improve its Bank Secrecy Act and anti-money-laundering controls, which had also drawn it a $50 million fine and limits on expansion in October 2004.
Mr. Ritter said Thursday that the regulatory issue, which it fully resolved last month, wasn't a hindrance.
In the interview, Mr. Moore said, "No time line was up when Dowd and I started talking, and there was no pressure to try to make the combination work. We had the luxury of time.
"Our biggest concern was keeping it confidential so we wouldn't be under any pressure to make an announcement before we were comfortable."
Mr. Ritter added, "Jack never brought up me being in the doghouse. Everyone in the industry knew what we were going through." They did, however, "talk about our BSA and anti-money-laundering technology," which Regions is interested in adopting, he said.
