NationsBank Corp. has moved to ensure its dominance in the Atlanta market by agreeing to acquire Bank South Corp., but it will have to pay a high price.
NationsBank, which already owns the largest bank in Georgia, announced its agreement Tuesday to exchange 0.44 share of common stock for each share of Bank South.
The indicated value of about $27 per Bank South share, or $1.6 billion, was 2.4 times book value and well above the median of 1.8 on all bank deals since Jan. 1, 1994, according to SNL Securities of Charlottesville, Va.
NationsBank's price fell Tuesday by $62.5 cents, to $60.875, lowering the Bank South exchange value to $26.79. But securities analysts did not see the deal as a harbinger of higher premiums. They said NationsBank could afford to go above two times book because of cost-cutting opportunities, given the companies' overlaps in the Atlanta region.
Bank South's share price, meanwhile, rose $2.375, to $25.875. (For markets report, see back page.)
NationsBank disclosed a cost-cutting plan that seems impressive even by past in-market merger standards. It expects to lop off 60% of Bank South's noninterest expense, or $175 million.
Bank South, which has $7.4 billion of assets, earned only $80.2 million last year.
The $184 billion-asset NationsBank, which is based in Charlotte, N.C., said the transaction will have "no discernible effect" on its 1996 earnings and will add to earnings per share in 1997.
To bolster that argument, NationsBank predicted it would earn $7 a share in 1995, 3% above consensus estimates of $6.82, while maintaining its projected growth rate of 12% to 15% in earnings per share.
NationsBank was also helped by a sharp appreciation in its own stock price over the past month.
"We had the currency and we had the in-market savings," said NationsBank president Kenneth Lewis.
Bank South talked to other potential acquirers during the past month while it was negotiating with NationsBank - reportedly SunTrust Banks Inc. and Wachovia Corp. - but none could match the NationsBank offer.
Bank South chairman and chief executive officer Patrick L. Flinn confirmed that no players from outside the Southeast, such as Banc One Corp. or BankAmerica Corp., had been involved.
"The economics are such that only an in-market player could have the capacity to pay what the shareholders deserve to get," Mr. Flinn said.
He said the ability to strike the deal with NationsBank was an indication of Bank South's success. "We are forming a partnership that rewards shareholders and offers customers access to an even broader array of products and services," he said.
Mr. Lewis praised Bank South for excelling at customer service, which will help the companies "assure a smooth and seamless merger."
Excluding possible divestitures of branches in the same localities, and based on mid-1994 data, Bank South would add 10 to 11 points of market share to NationsBank's in the Atlanta area, bringing it to about 27% of deposits. SunTrust Banks Inc.'s Trust Company Bank and Wachovia Bank of Georgia would be next, each at about 14%.
"Bank South is a well-positioned bank in one of the most attractive markets in the country," Mr. Lewis said. "This merger also reinforces the NationsBank commitment to Atlanta and will allow us to play an even more effective role in serving markets throughout Georgia."
Mr. Lewis declined to say how many Bank South branches or employees would be eliminated in the consolidation, except to say the number would be substantial in both cases. But Mr. Lewis also said NationsBank's employee attrition rate in Atlanta is high enough to accommodate most of Bank South's 2,500 people by the first quarter of next year, when the deal is expected to be consummated.
The NationsBank executive said he has offered Mr. Flinn a role in the merged organization, but Mr. Flinn, 53, whose own Bank South shareholdings promise a big payoff, is undecided about his plans.
NationsBank and Bank South signed their definitive agreement late Sunday, after completing negotiations on Thursday and getting approvals from both boards of directors.
NationsBank performed due diligence of Bank South over the Labor Day weekend, according to Mr. Lewis.
He said he began formal discussions with Mr. Flinn on July 31 in the offices of the Atlanta law firm of Alston & Bird, which represented Bank South. Mr. Lewis said the president of NationsBank of Georgia, James Lientz, had previously contacted Mr. Flinn about making a deal.
The buyout represents a major victory for Bank South's current management team, which took over in 1991 when the Atlanta-based company's shares were trading at $5 because of real-estate-related losses.
Virgil R. Williams, a prominent Georgia businessman and political figure who is one of Bank South's largest shareholders, said Bank South had weighed its options over the past four years and concluded that it could never provide, on its own, the return to shareholders that NationsBank offered.
Though Bank South has recovered from its loan problems, the company remained saddled with an efficiency ratio of 68%, which exceeds peer levels. Bank South faced the daunting challenge of trying to reduce those expenses while at the same time investing in new technology and alternative delivery systems.
"Clearly, we were having trouble getting it down," Mr. Williams said of the expense level. "In no event could we reduce our costs by 60%, as NationsBank is now going to do, and provide the same shareholder returns. The numbers control at the end of the day," he added.
For NationsBank, the deal for the heavily retail-oriented Bank South cements the No. 1 market-share position that it first established with the 1991 acquisition of C&S/Sovran Corp., which owned Citizens & Southern National Bank of Atlanta.
NationsBank currently has a 16.12% deposit share in the eight Atlanta- area counties in which Bank South has garnered 10.5%: Clayton, Cobb, Dekalb, Fayette, Forsyth, Fulton, Gwinnett, and Rockdale.
SNL Securities calculated that the market concentration in Atlanta of a combined NationsBank-Bank South would not trigger antitrust problems. But the investment firm did say the postmerger concentration could pose a problem for the oft-rumored merger of SunTrust and Wachovia, which would have more than 30% of the market.
Any NationsBank divestiture in Atlanta will leave intact most of Bank South's supermarket branch network, according to Mr. Lewis. Of Bank South's 149 branches in Georgia, 60 are in grocery stores, most of them Kroger markets in Atlanta.
NationsBank historically has not been bullish on in-store branching. "I knew how to make them profitable, but I didn't know how to make them matter, because they were so small," Mr. Lewis said.
NationsBank revised its thinking about the matter during the past year and recently signed commitments to increase its in-store branches in Texas from 11 to 40 by the end of 1996.
"We think the grocery store concept makes a lot of sense, in giving added convenience to your customers but not going with full-size, expensive branches," Mr. Lewis said.
Bank South will also contribute Georgia's largest automated teller machine network, at 267 machines, which compares with NationsBank's 238.
Mr. Lewis said NationsBank's strategy will be to build on market-share gains that Bank South has made over the last few years, but do a better job of cross-selling products and services to that customer base.
While Bank South has used its supermarket branches effectively to bolster market share, it has had less success making those relationships profitable.
"We'll do a better job, and we'll do it less expensively since we're taking out so much cost," Mr. Lewis said.
Stock analysts saw the deal as largely defensive for NationsBank, in that it keeps out-of-region interlopers like Banc One at bay.
"They've much solidified their position as No. 1 (in Atlanta) and pretty much kept someone else out," said Moshe Orenbuch of Sanford C. Bernstein & Co.
Anthony R. Davis of Dean Witter said the deal puts pressure on SunTrust and Wachovia to defend their market positions.
"First Union and NationsBank have created such a presence in the capital market and investment banking areas in the Southeast that the other major superregionals in the region are going to have to look at some type of competitive response," Mr. Davis said.
Virgil Williams, the big Bank South shareowner, said, "This whole consolidation process that's going on in our country in the banking industry is a fairly overwhelming force. Your choices are limited when you have a real deal facing you."
After Bank South goes, Atlanta will be left with one big hometown-bank headquarters - that of SunTrust. Mr. Williams said Georgia is "reaping what it sowed many years ago" in laws that prohibited statewide branching.