Will Iberiabank's no-premium deal touch off big-bank M&A wave?
Iberiabank’s acceptance of a no-premium merger with First Horizon National has renewed chatter about the potential for more big-bank deals.
The $3.9 billion merger will create a $75 billion-asset regional power with branches in 11 states and the opportunity to cut $170 million in annual expenses. First Horizon will keep its name, board majority, the CEO post and its Memphis, Tenn., headquarters.
While Iberiabank investors may not see an immediate boost to the value of their holdings — beyond a 43% spike in their dividend — the expectation is that they will benefit from long-term appreciation of First Horizon’s stock. The deal, which priced Iberiabank at a discount to its closing price the day before the announcement, is expected to be 22% accretive to the seller’s 2021 earnings per share.
“We expect to generate peer-leading profitability from this no-premium deal over time,” B.J. Losch, First Horizon’s chief financial officer, said during a recent presentation.
“It's financially attractive in terms of that accretion, but [as] importantly, on increased capital generation more than what we would have done separately,” Losch added. “We can reinvest in our company, in our customers and for the benefit of our shareholders.”
The deal's long-term potential, combined with mounting concerns about business conditions, could make other banks more willing to sell at lower prices, industry observers said.
“This deal may represent a new page in the M&A playbook,” said Joe Bonner, a bank consultant and former CEO of Frontier State Bank in Oklahoma City. “I think the impact of rates and margin compression is driving — and will drive — a lot of decisions.”
Investors are looking for more mergers involving banks with assets of more than $15 billion, including Regions Financial in Birmingham, Ala., said Stephen Scouten, an analyst at Sandler O’Neill. Regions recently said it was open to a no-premium merger.
“It’s probably safe to say we will see more,” Scouten said.
Iberiabank, like most other banks, is facing myriad revenue pressures. In addition to lower rates and tighter margins, Iberiabank likely took into account decelerating loan demand, intense competition and rising concerns about credit quality as it mulled a deal with First Horizon, industry observers said.
Iberiabank should also lower its energy concentration by merging with First Horizon.
The Lafayette, La., company’s energy book made up about 6% of total loans outstanding at Sept. 30. While Iberiabank recently characterized the portfolio as “stable” and in a "net recovery position," about 1.7% of the loans are classified or nonperforming.
Iberiabank is merging with a bank with more sources of fee income, including a substantial capital markets business, that can offset the downside of lower loan yields tied to recent rate cuts, industry observers said.
Investors have so far been supportive of the deal and its metrics, including a cost-savings target that analysts noted was below that of other recently announced mergers of equals. First Horizon’s shares have risen by 3% since the deal was announced; Iberiabank’s stock is up more than 2%.
“We have what we think is a very achievable number” for cost cuts, Bryan Jordan, First Horizon’s chairman, president and CEO, said during a Nov. 4 conference call to discuss the merger. “We think it may end up being conservative, but we … would rather be smart about how we put the organizations together.”
Investors have also been fairly receptive to BB&T’s agreement to acquire SunTrust Banks, which was also labeled as a merger of equals.
The $128 billion-asset Regions has taken notice.
First Horizon-Iberiabank “causes us to think differently about” no-premium deals, David Turner, Regions’ chief financial officer, said during a conference last week.
“At the end of the day, the no-premium/low-premium deals give you a little more leeway if you had made a misstep in judgment on something,” Turner added. “I think the market is rewarding those deals. … I think we could participate in something like that, perhaps.”
Such reaction says a lot, because bankers and investors are typically skeptical about mergers of equals, largely over concerns about cultural clashes and integration risk, said Mike Matousek, a trader at U.S. Global Investors.
“When you get egos involved, there’s plenty of risk that an MOE integration doesn’t go smoothly,” Matousek said.
Iberiabank and First Horizon are providing assurances that they are on the same page and determined to make the year’s second-biggest bank merger work.
“This is very much a people business — all about relationships,” Daryl Byrd, who is Iberiabank’s president and CEO and is to become First Horizon's executive chairman after the deal closes, said in an interview. “We are very focused on that.”