Sovereign Bancorp agreed Tuesday to buy Peoples Bancorp, Lawrenceville, N.J., for $400 million in a stock deal structured to insulate both parties from the roiling market.

The deal, which is slated to close early in the second quarter, features a provision that would allow $875 million-asset Peoples to kill it if Sovereign stock fell below $11 and traded at a 10% discount to that of comparable institutions.

Shares of Sovereign, a $20 billion-asset thrift based in Wyomissing, Pa., closed Tuesday at $12.50, down 62.5 cents.

Though termination clauses are not unusual in bank mergers, they typically provide a more generous cushion for the buyer when a deal is announced. Given market volatility in recent weeks, such termination provisions are being closely watched by analysts, investors, and bankers.

"Acquiring companies are particularly getting hit in this market downturn," said Chad Yonker, an analyst with Fox-Pitt, Kelton. The termination provision "is something that probably makes sense to talk about."

Some deals have already been put to the test. Last week Triangle Bancorp of Raleigh, N.C., upped its price for United Federal Savings Bank, Rocky Mount, N.C., after its shares dropped below the minimum levels established in the merger agreement.

Analysts said they expect the Sovereign deal to go through, saying that at 1.2 times Peoples' book value, the transaction is cheap and relatively small.

"This is a done deal," said Jay S. Sidhu, Sovereign's president and chief executive officer. "The chances of this not getting done are very remote."

Sovereign is an experienced acquirer for whom "making acquisitions is a core competency," said Thomas O'Donnell, an analyst with Salomon Smith Barney. "A decade ago this was a tiny thrift outside Reading, Pa. Now it's a major player in the tri-state area" of Delaware, New Jersey, and Pennsylvania.

The announcement comes on the heels of Sovereign's $320 million cash acquisition of 93 former CoreStates branches. That deal, which included $2.1 billion of deposits and $800 million in loans, closed Friday and boosted Sovereign's presence in and around Philadelphia.

Mr. Sidhu said the acquisitions complement one another. "The addition of Peoples is perfectly timed with our (CoreStates) acquisition," he said. The excess capital of Peoples could be used to pay for the cash acquisition of the CoreStates branches, and both deals would add slightly to earnings in 1999, Mr. Sidhu said.

The acquisition of the CoreStates branches left Sovereign's capital reserve a little thin, but Mr. Sidhu said the addition of highly capitalized Peoples would help boost capital levels.

Peoples is a bank holding company and along with CoreStates branches, helps Sovereign position its balance sheet to look more like a bank's.

Sovereign has been reducing its mortgage lending while increasing its consumer and small-business loans over the past few years.

"Our balance sheet today resembles that of a commercial bank more than a thrift," Mr. Sidhu said.

The deal for Peoples would give Sovereign a larger presence in the New Jersey cities of Lawrenceville, Princeton, and Trenton. The area, home to several large companies and universities, is attractive to banks and thrifts because of its growing population of wealthy individuals, analysts said.

Sovereign plans to cut $6.1 million, or 40%, from Peoples' operating expenses. The thrift expects to take a merger-related, pretax charge of $27 million when the deal closes.

Wendell T. Breithaupt, president and CEO of Peoples, would remain with the company as executive manager of New Jersey operations, Sovereign said. He would also be responsible for future mergers and acquisitions in New Jersey.

Mr. Breithaupt said his company had been approached by other potential buyers, but the deal was negotiated only with Sovereign and not put out to bid. He credited the bank's relationship with Mr. Sidhu for its choice of Sovereign as a buyer.

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