The Securities and Exchange Commission Friday approved First Bank System's plan to buy First Interstate Bancorp, but with one potentially deal-killing caveat - the Minneapolis company would have to suspend its share repurchase for two years once the transaction was completed.
The decision came less than a day after the Minneapolis bank had received some rare good news in the long-running battle for First Interstate: the Delaware Chancery Court ruled the Los Angeles bank's board was not obligated to accept the highest price it is offered. First Bank's bid is significantly lower than that of rival Wells Fargo & Co..
But any euphoria from that decision was quickly swept away by what First Bank called an "extremely" surprising SEC decision. Analysts said the decision was more than just a surprise.
"Wells Fargo just won," said David Berry, a bank analyst with Keefe, Bruyette & Woods Inc. "If you go back to their (First Bank's) original numbers, so much of their cost savings are based on accretion. And much of the accretion is related to their expected share repurchases after the merger."
First Bank's chief financial officer, Richard Zona, denied the ruling was a deal killer.
"Our compliance with this SEC requirement will not affect in a material way the attractive returns that our proposed merger with First Interstate represents to shareholders," he said. "We believe we will be able to achieve returns comparable to those presented in our financial projections through purchase business acquisitions and other growth initiatives."
Because First Bank's friendly deal for First Interstate is to be treated as a stock swap, or pooling, there are restrictions on share repurchases. Recently, the SEC has limited repurchase to only the three months after a pooling.
Wells Fargo's hostile bid is treated as a purchase transaction, so there are no restrictions on buybacks.
Despite First Bank's position that the merger is still very much alive, even its most ardent supporters on Wall Street were skeptical of the company's chances.
"This is clearly a setback for First Bank System," said Brent Erensel, a bank analyst with UBS Securities who had been one of the few boosters of First Bank's bid.
"It definitely tempers my enthusiasm for the deal, and on balance, given the large spread between the two bids, would give Wells a measure of superiority."
Also, S.G. Warburg's Francis X. Suozzo, one of the earliest proponents of the First Bank System deal, changed his opinion. "The wind is clearly behind Wells now," he said.
News of the SEC decision sent Wells' shares soaring $6.25 per share, to $217.25 while First Bank shares were unchanged at $48.50. Currently, Wells' offer is worth $144.69 per share - compared with $126.10 per share for First Bank's - a $1.4 billion difference.
In Delaware, the Chancery Court ruled that First Interstate need not auction itself and choose the highest bid available.
"We are halfway home with this ruling," said William J. Bogaard, First Interstate's general counsel. "While there were several causes of actions in Wells original lawsuit, the important causes were challenges to the termination fee and options, and second a challenge to the Interstate transaction process," which the court agreed did not require an auction.
Wells' side was quick to point out that the real decision will be made by investors at the First Interstate shareholder meeting in late February or March. They said last week's decisions by Chancellor William Allen in Delaware, where the companies are incorporated, were not as important.
The court also ruled that Wells Fargo was subject to tortious interference suit, alleging that its bid represented a contractual interference with the First Bank System deal.
Wells also voluntarily withdrew several other complaints it had filed at the time of the First Bank System offer.
Wells maintained the ruling allowed it to proceed with its central charge: that by accepting the First Bank offer and not withdrawing it poison pill, First Interstate's board had violated it fiduciary duties.
"We are very satisfied with the conclusion that our claims of breaches of fiduciary duty with respect to this matter are proceeding to trial, " said Allen Finkelson, an attorney with Cravath, Swaine & Moore, Wells' litigators.
The trial is scheduled for the week of Feb. 12.
The trial will also include arguments over the First Bank deal's lockup fees and options, worth $200 million, and charges First Bank artificially inflated its stock price by repurchasing its shares in November and December.