For a fire-sale price of $546 million, Zions Bancorp. of Utah is getting into the California banking mainstream.
Its deal for Sumitomo Bank of California, announced late Wednesday, would more than quadruple Zions' assets in California, to $6 billion, and would bring it into the Los Angeles and San Francisco markets for the first time.
"This will help Zions build a critical mass in California at a great price," said Joseph K. Morford, an analyst with BT Alex. Brown. "It's an exciting deal for Zions."
An analyst deemed the price "shockingly cheap," at 1.3 times Sumitomo's book value and 14 times 1997 earnings. Sumitomo's parent in Japan has been mired in that country's banking and economic woes.
Recent bank acquisitions here have gone for closer to 2.7 times book value and more than 20 times earnings, analysts said.
"The multiples are the lowest I've seen in the last couple of years," said James R. Bradshaw, an analyst with Pacific Crest Securities in Portland, Ore.
Harris H. Simmons, Zions' president and chief executive officer, said in an interview that it took some convincing to get him to look at the California bank's books. "Our initial thought was that it was not something we were interested in," he said.
The U.S. unit of Osaka, Japan-based Sumitomo Bank went up for sale in December. Zions was approached by Sumitomo's investment bank, Goldman, Sachs & Co., about a possible deal last year, but Mr. Simmons said he did not seriously consider it.
The investment bank persisted and "convinced us that it deserved another look," Mr. Simmons added.
While analysts praised the deal, some noted potential pitfalls.
Roughly 45% of Sumitomo Bank of California's customers are Japanese- Americans. If they prefer to keep their money in an Asian-controlled bank, they could switch to Los Angeles-based Sanwa Bank California, or to Unionbancal Corp., which, like Sumitomo, is based in San Francisco. Unionbancal is about 80% owned by Bank of Tokyo-Mitsubishi.
Mr. Simmons said his bank would try to retain as many profitable Asian customers as possible. But he acknowledged that there would likely be some customer runoff.
This was one reason $10.5 billion-asset Zions got such a good deal. "We would anticipate some shrinkage and we've designed that into the pricing," Mr. Simmons said.
In fact, Zions plans to take steps to gently prod some of the less- profitable Sumitomo customers out the door. At yearend 1997, approximately 25% of the California unit's $4.2 billion of deposits were certificates with balances above $100,000. Mr. Simmons described the margins on jumbo CDs as too thin.
"We are not going to run anyone out, but we are going to price those products in a way that will result in some runoff," Mr. Simmons said.
Sumitomo would be Zions' third California acquisition. In November, the Salt Lake City-based regional purchased $720 million-asset Grossmont Bank, San Diego. Zions announced a month later that it would acquire $350 million-asset Pacific National Bank, Escondido. That transaction is expected to close in the second quarter.
Zions is not expected to shutter any branches because of the Sumitomo deal, though Mr. Simmons suggested it may have to cut staff. The bank is looking for approximately 20% cost savings as it combines its three California acquisitions.
In addition, the Sumitomo deal should add 5 cents to 1998 per-share earnings and a dime to 1999 profits, Mr. Simmons said.
All of Zions' California branches will be consolidated under one charter, he added. Zions officials have not yet arrived at a name for the California bank, but it will not use Zions. Robert Sarver, chairman of Grossmont Bank and a Zions director, is to be named chief executive of the California operations.
At the close of the Sumitomo deal, which is slated for the third quarter, Zions plans to sell Mr. Sarver 5% of the newly combined California institution.
Under the merger agreement, Sumitomo's parent company, which owns approximately 85% of the California subsidiary's stock, would receive $32.36 a share; other shareholders would receive $38.25 per share.
