Pay close attention to Hancock Holding Co.'s takeover of Whitney Holding Corp., because there will be more like it next year.
Whitney said Wednesday it was selling itself to its smaller Gulf Coast competitor for $1.5 billion in stock. The deal includes a $200 million capital raise by Hancock and payment of Whitney's $300 million Troubled Asset Relief Program tab at closing.
Though it makes sense to combine two longtime rivals into a $20 billion-asset regional player, the timing and the higher-than-expected price really falls back to Tarp, analysts said. They predicted other banks will seek buyers to help cut ties with the Treasury Department rather than test the highly dilutive capital markets.
The Tarp repayment is "one of the big elements to why the deal happened in some ways," said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "Because if you're Whitney, or any other potential seller that has Tarp, you're faced with the dilemma of, 'Do I go out and raise capital or do I sell at a market premium? What's better for my shareholders?' "
Several companies announced deals recently to acquire a Tarp holder and absorb the Treasury's investment as part of the deal. M&T Bank Corp., for instance, said it would take on Wilmington Trust Corp.'s $330 million of Tarp preferred stock when it acquires the Delaware company. And Bank of Montreal, which announced a deal last week to acquire Marshall & Ilsley Corp. for $4.1 billion, said it plans to issue additional equity and pay the government $1.7 billion to end M&I's participation in Tarp.
There are a number of community banks that still owe Tarp, and many will begin to look for a buyer next year as the federal regulators restrict their dividend payments until they can repurchase their Tarp funds.
"The feds are going to come in tougher in the next quarter or two in terms of paying back Tarp," said Chris Marinac, an analyst at FIG Partners LLC. Rather than face the negative markets, "Whitney had to do something someday" in terms of paying back Tarp "and that someday is today," he said.
But like Marinac, most analysts were surprised by the higher-than-expected pricing of the deal, equating to $15.48 per share in the stock exchange for Whitney's shareholders, or 1.7 times tangible book value, including the nonperforming loan portfolio it plans to sell around the end of the year.
"What's debatable in this situation is why is Hancock paying such a high price," Fitzsimmons said.
It would be the fourth most expensive deal announced among community banks this year. The highest price-to-tangible-book value was Eastern Bank Corp.'s purchase in November of Wainright Bank and Trust Co. for $163 million, or 200.2% of tangible book, according to data provided by Sandler O'Neill.
Hancock's chief executive, Carl Chaney, said in an investor conference call Wednesday that Whitney — an $11.5 billion-asset bank in New Orleans — was attractive because of its 37% non-interest-bearing deposit base and large commercial and industrial book that would complement Hancock's predominantly residential portfolio. Plus, both banks have adjoining areas of operations, which combined would span five states from Texas to Florida, which "makes for a very perfect marriage."
Hancock, an $8.2 billion-asset bank with headquarters in Gulfport, Miss., also agreed to keep Whitney's name for its Texas and Louisiana branches because of the brand it has carried for more than 125 years. Some consolidation is expected; the companies projected $134 million of cost savings, or 18% of their combined expenses based on third-quarter call reports. The companies expect to complete the merger in the second quarter, pending shareholder and regulatory approval.
"This truly enhances our strategic position and our relevance," Chaney said during the conference call. "At end of day we'll be the envy of the financial institutions arena."
Whitney's credit problems, however, have not been enviable.
Marinac said Hancock is considered a highly conservative operation and with Whitney's credit risk, primarily in Florida, it does raise questions in terms of the higher-than-expected price offered and the estimated markdown to Whitney's $7.6 billion loan portfolio.
Hancock's executives estimated a 6% markdown on Whitney's portfolio, which most analysts said is typically in the double digits for similar transactions.
"I think arguably the mark taken on their portfolio seems a little low compared to the others that we've seen," Fitzsimmons said. "Time will tell if that’s conservative enough."
Regardless, Fitzsimmons said "the takeaway seems to be M&A is here, and M&A on a premium price."