FirstMerit Corp (FMER.O) made a $952 million bid for Citizens Republic Bancorp CRBC.O, surprising investors who expected a larger Midwest bank to snap up the Michigan-based lender.
Shares of FirstMerit, which said it will pay for the acquisition with stock, fell as investors factored in the dilution. The Akron, Ohio-based bank's shares were down 10 percent at $15.41 on the Nasdaq on Thursday afternoon.
"People are concerned that FirstMerit might have been stretched for the deal," Macquarie analyst Thomas Alonso said.
"They have to get some debt and preferred stock to get the deal done and this might have some effect on their capital ratios."
FirstMerit said it also expects to repay $345 million in bailout funds that Citizens Republic received from the U.S. Treasury, including an estimated $45 million in deferred dividends.
Citizens had reportedly been exploring options, including a sale, and analysts had named banks including Huntington Bancshares Inc (HBAN.O) and Fifth Third Bancorp (FITB.O) as potential buyers.
"A company like FirstMerit, I thought, was a low probability given how large Citizens is compared to it," Keefe Bruyette and Woods analyst Christopher McGratty said.
Citizens has about $9.7 billion in assets compared with FirstMerit's $14.6 billion, according to Thomson Reuters data.
The deal will help Chicago-focused FirstMerit expand its footprint into Michigan and Wisconsin.
"With a five-state reach that will extend from Western Pennsylvania to Wisconsin, FirstMerit looks to become the bank of choice among businesses and individuals across the upper Midwest," FirstMerit Chief Executive Paul Greig said in a statement.
This is the largest acquisition FirstMerit has made in at least two decades. Its most recent buys have been of troubled banks made with government assistance.
Citizens Republic shareholders will receive 1.37 FirstMerit shares for each share they tender to the offering.
Based on FirstMerit's Wednesday close, the Akron, Ohio-based bank is paying $23.51 for each Citizen share, a premium of 18 percent.
However, based on FirstMerit's share price of $15.41 in early afternoon trading on Thursday, the offer was worth around $21.11 per Citizens share.
Citizens stock was up about 2 percent at $20.25.
The deal is the second large-bank merger in a little over two weeks. M&T Bank Corp (MTB.N) agreed to buy Hudson City Bancorp HCBK.O for $3.7 billion late last month, in what was the biggest bank acquisition of the year.
Analysts have been arguing for years that the 7,300 U.S. banks are ripe for consolidation. But the pace of consolidation since the 2008 financial crisis has been disappointing and deal volume this year has declined by more than a quarter from a year earlier, according to Thomson Reuters data.
(Reporting by Jochelle Mendonca in Bangalore; Editing by Supriya Kurane and Joyjeet Das)