BMO is taking a number of steps to conserve its capital, including halting share buybacks, as it prepares to close the Bank of the West transaction.CARLOS OSORIO/Reuters
Bank of Montreal BMO-T is looking to Canada’s largest pension plans to help back its planned $21-billion takeover of Bank of the West, after a string of domestic companies have successfully tapped institutional investors for expansion capital.
In late December, BMO revealed it planned to raise approximately $2.7-billion from a stock sale to help pay for its proposed acquisition of the 1.8-million-customer, San Francisco-based bank from BNP Paribas. In an investor presentation, BMO said it would sell the stock “in public or private markets.”
BMO unveils major U.S. expansion with $17-billion purchase of California-based Bank of the West
The Bank of the West takeover is the largest undertaken by a Canadian bank. BMO is expected to pitch deep-pocketed fund managers such as the Caisse de dépôt et placement du Québec, Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan as cornerstone investors in the potential stock sale, according to investment bankers at rival dealers. BMO executives declined to provide further comment on the financing. The Globe and Mail is not identifying the sources because they are not authorized to speak publicly about the deal.
BMO is also taking a number of steps to conserve its capital, including halting share buybacks, as it prepares to close the Bank of the West transaction. The Canadian buyer plans to use both its excess capital and any extra reserves at the U.S bank to fund most of the takeover.
Pension plans have backed a number of Canadian companies doing foreign acquisitions by making significant equity investments through private placements of stock. The approach appeals to fund managers because they can acquire stakes at a discount to where the stock is trading, while an acquirer such as BMO can lock in capital and use the lead order from a well-known institution to help market its shares to other potential investors in a public stock offering.
In 2020, the Caisse, CPPIB and Teachers joined forces to acquire $3.2-billion of shares in a private placement from Intact Financial Corp., allowing the Toronto-based insurer to pay $5.2-billion for British rival RSA Insurance Group PLC. Intact then sold another $1.25-billion of its stock to other investors. In 2017, the same three fund managers purchased Intact shares through a private placement to help fund its $2.3-billion takeover of Minnesota-based OneBeacon Insurance Group.
The Bank of West acquisition is expected to close by the end of this year and BMO chief executive officer Darryl White said on a conference call last month that the bank would likely sell stock to fund the takeover in the second half of 2022.
“It’s not something that we’re necessarily in a rush to do,” Mr. White said. The stock sale represents approximately 3 per cent of BMO’s market capitalization and Mr. White said: “It’s not a large deal, relative to our outstanding shares.”
Bank of Montreal’s U.S. strategy is paying off. But will the momentum last?
If both banks turn in strong financial performances in coming months, which they are expected to as interest rates rise and the North American economy continues to bounce back from the pandemic, capital reserves would increase and BMO would need to sell less stock to fund the takeover. However, an economic slowdown would cut into both banks’ reserves. In explaining the variables in a conference call, Mr. White said: “We’re saying it could be up to $2.7-billion. It could be less than that. It could be zero. It could be a little bit more.”
However, analysts said the prospect of a stock sale now weighs on BMO’s stock price and may prompt the bank to raise equity in coming weeks or months, if the opportunity arises.
In a recent report, analyst Darko Mihelic at RBC Capital Markets said: “We believe there is some uncertainty behind the $2.7-billion equity issuance, and the timing and approval of the transaction by regulators.”
Editor’s note: This article has been updated to reflect that Bank of Montreal has not started marketing its stock. A previous version of the story said the sales campaign had begun.
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Andrew Willis