Peoples Heritage Financial Group, a fast-growing thrift company based in Maine, announced an agreement Wednesday to acquire Banknorth Group Inc. of Burlington, Vt., for $780 million in stock.
The deal would create New England's fourth-largest banking company, with $17 billion of assets and branches in five of the six northeastern states.
Peoples Heritage, which plans to take the Banknorth name, would also gain $925 million of deposits and 26 branches in upstate New York.
"We believe we are creating the premier community banking franchise in New England," said William J. Ryan, president and chief executive officer of $12.6 billion-asset Peoples Heritage.
The merger, scheduled to close in the fourth quarter, might take Peoples Heritage out of the bidding for the much-coveted divestitures stemming from Fleet Financial Group's pending $16 billion merger with BankBoston Corp.
Peoples Heritage was considered a front-runner for some of the 292 branches and $12.5 billion of deposits that the two Boston-based giants are to sell to maintain what regulators deem a desirable level of competition.
Though Mr. Ryan admitted the Banknorth deal "diminishes our interest," he refused to rule out his company's participation in the bidding.
Analysts said they would be surprised to see a serious run at the Fleet branches. "They will have more than enough to keep them busy for the next 12 months or so," said Jim Ackor, analyst with Tucker Anthony Clearly Gull Inc. in Portland, Maine, which is also Peoples Heritage's headquarters city.
Kevin T. Timmons, an analyst with First Albany (N.Y.) Corp., said he had "mixed feelings" about the deal. Rather than expanding into Vermont, he said, "I believe the markets would have rather seen them buying Fleet branches in Massachusetts and Connecticut," which are faster-growing markets.
"But there is no guarantee they would have won the divestiture," he added, "and the price they are paying for Banknorth is good."
Peoples Heritage agreed to exchange 1.825 shares of its common stock for each share of Banknorth in a pooling of interests. The price equals 2.35 times Banknorth's book value and 14.6 times estimated 1999 earnings.
Shares of Peoples Heritage fell 6.6% on Wednesday, to $16.8125. Banknorth climbed 9.81%, to $29.375.
Mr. Ryan would run the new Banknorth. William H. Chadwick, president and CEO of the $4.4 billion-asset Vermont holding company, announced in March that he will retire at yearend. Five Banknorth directors are expected to join the new company's 21-member board.
"It's a magnificent extension of Peoples Heritage's frost-line franchise" in upper New England, said John S. Carusone, president of Bank Analysis Center in Hartford, Conn. "They have built one of the most enviable banking companies in the Northeast, and this is an attractive complement."
There are still attractive takeover targets in central and southern New England, he added.
"The secret of their success has been to expand in less competitive markets, where there is some price flexibility," said Mr. Ackor. "In that sense, Vermont is very compatible with the rest of their franchise."
The combined companies might now be more attractive to a larger acquirer.
"I am a little surprised they were not bought themselves," said Deborah Beylus, managing director at Sterling Financial Investment Group, Boca Raton, Fla. "It is a great company."
The Banknorth deal would be Peoples Heritage's third big bite in 14 months. In April 1998, it swallowed $3 billion-asset CFX Corp. of Keene, N.H., and early this year it bought $2 billion-asset SIS Bancorp of Springfield, Mass.
Peoples Heritage has the top market share in Maine and New Hampshire, while Banknorth is second in Vermont. After the merger, Banknorth would rank sixth in Massachusetts.
The buyer is taking the Banknorth name because "it more clearly represents our presence" throughout New England, said spokesman Brian Arsenault. There is no plan, however, to combine the companies' numerous subsidiaries under one name and charter.