Toronto-Dominion Bank TD-T faces further uncertainty with its US$13.4-billion takeover of First Horizon Corp. FHN-N as the U.S. banking crisis creates new regulatory concerns and the Tennessee-based bank’s shares tumble.
Shares of First Horizon have been plummeting, sinking more than 20 per cent since Silicon Valley Bank’s demise nearly two weeks ago, sending U.S. regional banks stocks tumbling. Early last year, TD agreed to buy First Horizon for US$25 a share, higher than the US$15.58 that the U.S. bank’s share price closed at on Wednesday. At its widest, the spread between TD’s offer and First Horizon’s beleaguered stock was US$10 on Friday.
First Horizon’s battered share price opens a wormhole of possibilities for the deal, potentially changing the regulatory winds and providing it with a window to go back to the table to renegotiate its offer.
The takeover bumped up against delays even before Silicon Valley Bank’s failure. In early March, TD said in a regulatory filing that it does not expect to receive regulatory approvals in time to complete the deal before its merger deadline of May 27. Just three weeks earlier, the two banks announced that they had “mutually agreed” to extend the merger deadline to May 27 from Feb. 27.
Mergers of U.S. banks require various agencies to greenlight deals, including the Federal Reserve and the Office of the Comptroller of the Currency – all of which have increased scrutiny of combinations in the sector at the direction of U.S. President Joe Biden.
To help clinch the deal, TD announced in February a community-benefits plan that focuses on banking access and other services for diverse and underserved groups in the U.S., with a commitment of US$21-billion in home lending for lower-income and minority communities, among other initiatives. Even after that promise, regulatory approvals dragged on past anticipated timelines.
But under the current market conditions, analysts and investors say regulators may be more willing to approve the deal as concerns about competition are replaced by the need to ensure regional banks are well capitalized. Failed Silicon Valley Bank and flailing First Republic Bank have yet to attract any buyers, and the fallout from both prompted federal agencies and the country’s largest lenders to offer up money to stem the further spread of runs on deposits.
“If you’re the regulator in the U.S., you want the deal to go through,” AGF Management Ltd. chief executive and chief investment officer Kevin McCreadie said in an interview.
“The regulator probably has a different tune about this, more from a capital side rather than if they were worried about some kind of franchise overlap.”
Given the plunge in First Horizon’s shares, TD has the opportunity to renegotiate its original offer. In the past two weeks, the U.S. bank lost a quarter of its market capitalization, valuing it at far less than TD’s bid that initially won over shareholders. But even amid market turmoil, First Horizon shareholders could also ultimately reject a lower offer.
“From the TD shareholder perspective, they’d want a negotiated price that would still make the transaction accretive,” Canaccord Genuity Corp. analyst Scott Chan said in an interview. (A deal is accretive when it boosts a company’s earnings per share.)
The concerns about the First Horizon deal stretch beyond market swings and capital needs and into key industry metrics. Deposits at First Horizon slumped 10 per cent over the last two quarters, according to CIBC Capital Markets research.
Deposits have fallen across the U.S., but more prominently at regional banks. California-based regional bank PacWest Bancorp said Wednesday that customers withdrew 20 per cent of their deposits since the beginning of the year. At First Republic, customers pulled US$70-billion in deposits, almost 40 per cent of its total, according to a report Monday by The Wall Street Journal, citing people familiar with the matter.
Keefe, Bruyette & Woods analyst Mike Rizvanovic said that it is reasonable for TD to be looking to renegotiate the price.
“The market has changed quite a bit in the last couple of weeks and it’s fair to say that risks have risen in the sector overall,” Mr. Rizvanovic said in an interview. “If anything, [TD is] just exploring options, which most outsiders looking in would probably say is a fair thing for them to do in light of the circumstances.”