October 2, 2007 / 11:52 AM / 11 years ago

UPDATE 5-TD Bank expands in U.S. with $8.5 bln deal

(Adds comments. In U.S. dollars unless noted) (Eds: note unusual spelling vFinance in paragraph 16)

By Jonathan Spicer

TORONTO, Oct 2 (Reuters) - Toronto-Dominion Bank (TD.TO) said on Tuesday it plans to buy New Jersey-based Commerce Bancorp Inc (CBH.N) in a friendly $8.5 billion deal that would nearly double the scale of the Canadian bank’s U.S. business.

The cash and stock deal offered a 7 percent takeover premium to Commerce’s closing share price on Monday, but the premium shrank as TD’s stock declined on Tuesday.

Based on number of branches, the deal would create the seventh-biggest bank in North America.

“With this deal TD has achieved critical mass in the United States,” TD Bank’s president and chief executive, Ed Clark, said on a conference call.

Commerce, New Jersey’s biggest bank, was considered vulnerable to a takeover following the departure of longtime CEO Vernon Hill in June, amid investigations into dealings with insiders.

“He was the soul and the life of the company and when he was pushed out, the life of the company was drawn out as well,” said Gerard Cassidy, an analyst at RBC Capital Markets, who described the pricing of the deal as “not extraordinary”.

TD Bank, Canada’s second-biggest bank, is offering 75 percent stock and 25 percent cash for Commerce, which TD said worked out to $42.37 a share based on Monday’s closing price.

Based on Tuesday afternoon’s share price for TD, the offer amounted to about $40.53 a share, or $8.2 billion.

TD stock was down $4.44, or 5.8 percent, at $72.50 just after noon on the New York Stock Exchange, and was C$3.83 lower at C$72.50 on the Toronto Stock Exchange.

Commerce shares, which are trading ex-dividend, were down 28 cents at $39.33 on the New York Stock Exchange.

TD said it would take a one-time pretax restructuring charge of about $490 million and that the takeover would dilute its earnings in 2008 and 2009.

Clark has said for months that his bank planned to grow internally in the United States through its TD Banknorth unit in New England, but he did not rule out U.S. acquisitions.

Clark said on the call Tuesday morning that the transaction’s pricing is reasonable, and that the two banks’ business models were “strikingly similar.”

But RBC’s Cassidy said the integration risks were high for the TD-Commerce deal “due to the fact that the culture of the organization will change dramatically”.

The transaction is expected to close in March or April 2008, subject to shareholder and regulatory approval. TD expects cost synergies of $310 million by 2009.

“Looking at past option activity, investors were anticipating a higher takeover price for Commerce Bancorp,” said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

Commerce President and Chief Executive Robert Falese said on the conference call that the bank felt the valuation was “reasonable and fair.”

TD said the transaction is expected to cut earnings per share by 28 Canadian cents in fiscal 2008, and by 22 Canadian cents in 2009. On an adjusted basis, it will be 10 Canadian cents dilutive in 2008 and flat in 2009.

Mario Mendonca, an analyst at Genuity Capital, noted that Commerce’s “significant exposure to the U.S. mortgage market through loans and securities, and the potential for further charges associated with reducing Commerce’s carry trade, significantly raises (TD’s) risk profile.”

EASIER CROSS-BORDER ACQUISITIONS

Canadian banks have made record profits in recent years, but are prevented from merging with each other, prompting them to look outside Canada for immediate growth.

Cross-border acquisitions have also been made easier for Canadian firms by the robust Canadian dollar, which reached parity with the U.S. dollar recently for the first time in more than 30 years.

“It’s not a cheap deal; it’s the only thing that TD could do,” said Brad Smith, analyst at Blackmont Capital.

The deal includes a break fee of 3.9 percent, or about $330 million, and several analysts said rival bids should not be ruled out.

Commerce has long fared well in independent customer satisfaction surveys, and there was much talk of “cultural” similarities on the call. But the bank has struggled recently with tight lending margins. The latest probe by U.S. regulators into the insider trading allegations, announced in January, has stalled branch expansion, a key to profit growth.

Clark said he was confident Commerce’s regulatory issues will not affect growth.

TD Banknorth already has a presence in New Jersey and parts of Philadelphia, Cassidy said, “so there certainly will be some branch reductions.”

(Additional reporting by Lynne Olver in Toronto, Christian Plumb in New York and Doris Frankel in Chicago)

$1=$1 Canadian

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