How First Citizens-CIT deal finally got done

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Negotiations over the sale of CIT Group in New York took place in fits and starts for nearly a year before a deal was reached last month.

First Citizens BancShares in Raleigh, N.C., agreed on Oct. 16 to buy CIT for $2.2 billion. The transaction — the third-biggest bank deal announced in 2020 — would create the nation’s 19th-biggest bank, with $110 billion in assets.

Each party broke off negotiations in the months preceding the pandemic, according to a regulatory filing Monday tied to the proposed merger. And two other unnamed companies also submitted offers to buy CIT over the summer.

Frank Holding Jr., First Citizens’ chairman and CEO, reached out to a CIT director in early November 2019 to express an interest in a merger. That led to a phone call between Holding and Ellen Alemany, CIT’s chairwoman and CEO. The two of them met in person on Nov. 15.

Those conversations took place just a few weeks after Alemany had hinted during a conference call that she was open to selling CIT, which had just agreed to buy Mutual of Omaha Bank.

Though CIT Group had spurned First Citizens BancShares twice by the spring, its directors kept weighing the idea of selling sooner rather than later in light of the pandemic-driven recession. The two sides continued talking and announced a deal in October.

Alemany met with the chairman and CEO of another company on Dec. 5 to discuss a potential merger, the filing said.

First Citizens on Dec. 9 sent CIT an unsolicited letter of intent that sought exclusive negotiations and had a Dec. 24 deadline. CIT’s board quickly determined it would not pursue a transaction.

Instead, CIT formed a transaction committee composed of four independent directors to evaluate merger proposals, seek advice from outside firms and facilitate communication among the board, management and financial advisers.

First Citizens, undeterred by CIT’s rejection, hired Piper Sander in mid-January to help it pursue a deal.

Meanwhile, Alemany and John Fawcett, CIT’s chief financial officer, met with the unnamed suitor’s management team three times between Jan. 20 and Feb. 2. The executives also met with First Citizens’ senior management on Feb. 11.

First Citizens sent word to CIT after the Feb. 11 meeting that it “would not be moving forward … because discussions with CIT had not sufficiently advanced from First Citizens’ perspective,” the filing said.

First Citizens sent CIT another unsolicited letter of intent on April 29 that pressed for exclusivity and set a May 13 deadline.

CIT’s transaction committee rejected the overture.

But CIT’s board was continuing to consider the company’s future. At a May 27 meeting, directors discussed the uncertain credit outlook tied to the coronavirus pandemic, along with the options of selling now or waiting.

The board also reviewed the results of an evaluation of the revenue and cost synergies associated with merging with First Citizens or the other interested party. The board instructed its investment banks to explore potential deals with both of the companies.

CIT entered into confidentiality agreements with First Citizens and the other companies in early June. Both suitors were informed that CIT was holding talks with another institution.

A third company contacted CIT on July 10 to express interest in a merger, which led to another confidentiality agreement. All of the companies were informed that another suitor had entered the picture.

CIT received letters of intent from First Citizens and the other companies in mid-August. Each provided all-stock offers.

First Citizens proposed exchanging 0.049 shares of its stock for each CIT share, subject to a 5% to 10% adjustment before a deal was signed. The terms would have given CIT shareholders ownership of roughly 34% of First Citizens’ common stock.

CIT’s shareholders would have owned 32% to 34% stake in one of the other companies. They would have gained a 40% stake in the third bidder.

The field thinned on Sept. 4 when the unnamed company that had met with Alemany in early December ended discussions, citing “its own internal considerations,” the filing said.

CIT’s transaction committee held virtual meetings with First Citizens and the other undisclosed suitor on Sept. 15, where the parties discussed their visions, potential value of each deal, the regulatory approval process, culture and governance structure.

First Citizens, as part of its due diligence, hired an outside firm to look into CIT’s corporate and specialty finance portfolio. Another company examined CIT’s rail, energy and factoring business lines.

First Citizens, in an offer submitted on Sept. 28, increased its exchange ratio to 0.05 shares, subject to upward adjustment, that would have given CIT shareholders ownership of nearly 37% of the combined company’s common stock. The offer had no board representation for CIT.

The other company held firm to its original exchange ratio.

CIT’s board sent First Citizens a list of “key issues” on Oct. 3, asking to replace the pricing formula with a single fixed-exchange ratio and a request for three board seats. First Citizens responded by saying it could agree to a 0.06 fixed-exchange ratio. It also agreed to add three CIT directors, including Alemany, to its board.

First Citizens also expressed an interest in having Alemany enter into an employment agreement.

Alemany and Holding went back and forth over the exchange ratio, with Holding agreeing on Oct. 6 to raise it to 0.062. That would give CIT shareholders 38.8% ownership of the combined company’s common stock.

Negotiations with the other company hit snags. The suitor was pressing CIT to take “certain actions” to preserve its deferred-tax assets, and it wanted language in the merger agreement to let it abandon a transaction if regulators required it to raise capital.

CIT ended discussions with the company in early October. The suitor briefly resurfaced on Oct. 9 with a revised bid that modified the terms for terminating a deal and removed certain stipulations associated with CIT’s deferred-tax asset.

CIT stuck with its decision to finalize a merger with First Citizens. The boards for each company unanimously approved the agreement on Oct. 15, and it was announced the next day.

The merger, expected to close in the first half of 2021, valued CIT at 43.9% of its tangible common equity, according to S&P Global Market Intelligence.

Holding will remain chairman and CEO, while Alemany would become vice chairwoman.

"Frank and I have long respected each other's companies and believe this transaction will accelerate our strategic goals by bringing together the expertise of both banks to create scale, strength and value,” Alemany said in a press release announcing the deal. “This transaction will … more fully unlock the potential in our core franchises.”

First Citizens expects to incur $448 million in merger-related expenses. It plans to cut $250 million in annual expenses, or roughly 10% of the combined company's operating costs. The deal is expected to be accretive to First Citizens' earnings and tangible book value.

Alemany would receive a $1 million annual salary and a guaranteed annual bonus of nearly $6.9 million at the end of every 12-month term after the deal closes. Alemany would also receive a $13 million retention bonus — to offset any money she would have received under CIT’s employee severance plan — on the second anniversary of the merger’s closing.

First Citizens can relieve Alemany of her vice chairwoman position six months after the deal's closing if she and Holding "mutually agree that [the] succession integration of CIT and First Citizens is sufficiently assured," the filing said. If that happens, Alemany would leave the board but would remain employed as a special adviser to Holding.

While she agreed to a noncompete clause after leaving First Citizens, Alemany will be allowed to serve as a nonemployee director or adviser at “any entity that does not derive more than 25% of its revenue from competing businesses, or a financial institution with assets in excess [of] $600 billion,” the recent filing said.

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