Toronto-Dominion Bank’s prospects of closing a major acquisition in the United States took a hit Wednesday after its merger partner, First Horizon Corp., disclosed that the deal is struggling to receive regulatory blessings in a timely manner.
In an annual filing, First Horizon, which is based in Memphis, Tenn., disclosed that TD TD-T recently told its management team that TD does not expect to get the required regulatory approvals in time to complete the deal before May 27, which is when their merger agreement is set to expire.
Merger deadlines can be extended more than once, but what makes Wednesday’s filing unusual is that First Horizon FHN-N and TD did not seem fussed about approvals only three weeks ago. At the time, the two banks put out a joint press release saying they had “mutually agreed” to extend the merger deadline from Feb. 27 to May 27. “TD and First Horizon are fully committed to the merger and continue to make significant progress in planning for the closing and the integration of the companies,” they added.
First Horizon disclosed in its annual filing Wednesday that “receipt of regulatory approvals for the pending TD merger has taken longer than originally anticipated.”
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First Horizon’s shares closed down 11 per cent to US$22.14. TD agreed to pay US$25 a share in a deal worth US$13.4-billion.
In an e-mailed statement, TD noted that the bank cannot say much until it reports earnings Thursday, but added that it “remains committed to the transaction” and that it has initiated discussions about another extension.
The announcement is the second major development for TD this week after the bank disclosed Monday that it will pay US$1.2-billion to settle a lawsuit from investors accusing it of contributing to a major Ponzi scheme.
Approvals for U.S. bank mergers must come from various parties, including the Federal Reserve, the Office of the Comptroller of the Currency (which is TD’s primary U.S. banking regulator) and various other regulatory, antitrust and other authorities.
Appeasing all of these bodies can take longer than desired for large deals, but it is rare for two merger partners to publicly appear at odds. “We view this as a negative development for TD’s U.S. growth strategy,” BMO Nesbitt Burns analyst Sohrab Movahedi wrote in a research note to clients Wednesday.
First Horizon’s disclosure was also made during a period of heightened scrutiny of U.S. bank mergers. President Joe Biden has asked for a broad review of competition rules, and the banking sector has been specifically targeted because so few deals have been blocked in recent history. Consumer-advocacy groups worry that merger synergies, or savings, are not always passed on to clients in the form of cheaper products.
In mid-February, TD announced a five-year community-benefits plan that focuses on lending, banking access and other services for diverse and underserved groups in the U.S. The package includes opening 25 new branches and promises US$21-billion in home lending for lower-income and minority communities, as well as additional funding for small-business loans and community-development investments.
The bank also said that there will not be any merger-related First Horizon branch closings, and that it will hire additional diverse employees to work on mortgage loans.
Bank of Montreal also faced a lengthy review of its $17.1-billion acquisition of California-based Bank of The West, which it announced in December, 2021. Like TD, BMO had to push back the deal’s closing deadline and participated in multiple public hearings with regulators. However, BMO received the necessary blessings in January and the transaction closed last month.
While TD says it is still committed to the First Horizon transaction, which it would use to build a substantial footprint in the U.S. southeast, National Bank of Canada analyst Gabriel Dechaine noted Wednesday that the takeover was met with mixed reactions.
Since the deal was announced, “common investor concerns relayed to us revolved around valuation/timing and TD’s ability to turn around a business that was generating subpar growth and that had faced integration issues of its own [from] a separate transaction,” he wrote in a note to clients.
TD paid 2.1 times First Horizon’s book value, and anything above two times is viewed as a premium price. U.S. banking-sector stocks have also dropped since the transaction was announced, with the KBW Nasdaq Bank Index falling 14 per cent over the past year.
With reports from Stefanie Marotta