M&T Bank Corp (MTB.N) agreed to buy smaller rival Hudson City Bancorp Inc HCBK.O for $3.7 billion, in a deal that allows the bigger bank to expand its presence on the U.S. East Coast.
The planned acquisition fills gaps in M&T's coverage area, which has grown in recent years after a series of acquisitions, and will boost the bank's earnings per share as soon as the deal closes. Hudson City has bank branches in New Jersey and the New York City metropolitan area.
The transaction is the biggest U.S. bank acquisition of the year. But analysts cautioned that Hudson City was looking to sell itself after being hit unusually hard by drops in interest rates over the last few years, and other big bank deals are not necessarily imminent.
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 28 percent from a year ago, according to Thomson Reuters data.
Hudson City, which specializes in mortgage lending, emerged from the credit crisis relatively strong. It earned praise from analysts for sticking to an old-fashioned business model of making good home loans and holding on to them, while many competitors made bad mortgages and sold them off to investors.
But in recent years, Hudson City has been walloped by falling rates, which pressured the income it earned from mortgages. Because the bank had funded itself with relatively high-rate debt that it could not easily refinance, its income was squeezed more than most banks'.
"For two years we found ourselves with more expensive debt than our asset yields," Hudson City Chairman and CEO Ronald Hermance said an interview. Twice Hudson City paid heavily to restructure its obligations, recording a loss last year as it ran up $1.9 billion in expenses to extinguish debt.
The sale to Buffalo, New York-based M&T amounts to the third and final restructuring to take out the last of that debt, said Hermance. He will have a seat on the M&T board.
M&T, in return, will expand its franchise in the Eastern United States and build up its network of branches that take deposits and make loans to individuals and small businesses in their communities, said M&T Chairman and CEO Robert Wilmers.
Wilmers, who joined M&T nearly 30 years ago, has won the backing of legendary investor Warren Buffett, whose Berkshire Hathaway Inc (BRKa.N) owns about 4 percent of M&T stock. In recent years, M&T has purchased Provident Bankshares in Baltimore, Maryland, and Wilmington Trust Corp in Wilmington, Delaware, as it expands its East Coast holdings.
The deal quickly won the endorsement of investors as shares of both companies surged when markets opened after the news. Hudson City shares closed 15.7 percent higher at $7.45 and M&T stock ended 4.6 percent higher at $89.82.
For Hudson City shareholders, the market move sweetened a 12 percent premium to the deal struck by the companies. Based on the Friday closing price of M&T stock, the deal was worth $7.22 for each Hudson City share.
A UNIQUE SITUATION
The takeover of Hudson City, based in Paramus, New Jersey, is the eighth-biggest bank deal since 2008, according to Thomson Reuters data. U.S. bank deals so far this year have added up to only $14.4 billion.
Marty Mosby, an analyst at Guggenheim Securities, said that while the deal and its terms are good for both sets of shareholders, it is unlikely to spark a lot more transactions.
"It is a unique situation," said Mosby. Most other banks are better-positioned to hold out for a rise in interest rates and do not have the same need to restructure or sell out, he said.
Hudson City shareholders are to receive M&T shares for 60 percent of the purchase, plus cash for other 40 percent. The total value per Hudson City share is fixed at 0.08403 M&T shares. The amount of cash will increase or decrease with the price of M&T stock until the deal's closing, which is expected in the second quarter of 2013, subject to approval by regulators and by shareholders from both companies.
M&T will obtain Hudson City's network of 135 branch offices; 97 are located in New Jersey, with the rest in downstate New York and in Fairfield County, Connecticut. The companies said there is "very little overlap" with M&T's branches.
The combined network will have 870 branches from Connecticut to Virginia.
M&T expects to cut Hudson City's operating costs by 24 percent, driven by what it called "redundant outsourced operations."
The transaction is expected to boost the combined company's capital ratios immediately, as well as its earnings per share.
In restructuring Hudson City's assets and liabilities, M&T intends to shrink Hudson City's $43.6 billion balance sheet by roughly one-third. M&T, which has $80.8 billion in assets, expects to gain about $28 billion of loans and $25 billion of deposits.
M&T traces its history to the founding of Manufacturers and Traders Bank in Buffalo in 1856.
(Reporting by Jochelle Mendonca in Bangalore and David Henry and Nadia Damouni in New York; editing by Joyjeet Das, Chizu Nomiyama, John Wallace and Matthew Lewis)