TD Bank, First Horizon 'merger disruption' should benefit rivals, analysts say

Several banks competing in the U.S. Southeast could benefit from any fallout from First Horizon Corp.'s sale to TD Bank Group, analysts said.

TD Bank Group, which consists of The Toronto-Dominion Bank and other subsidiaries, announced Feb. 28 plans to acquire Memphis, Tenn.-based First Horizon for $13.4 billion in an all-cash deal. TD Bank executives said the acquisition will give it exposure to the higher growth markets in such states as Tennessee, Louisiana, Florida, North Carolina, Georgia and Texas.

But large deals often lead to operational challenges, and Southeastern banking institutions, such as Pinnacle Financial Partners Inc., could capitalize from dislocation in the First Horizon deal, Truist analysts Jennifer Demba and Brandon King wrote in Feb. 28 report. Other beneficiaries could include Hancock Whitney Corp. and Synovus Financial Corp., they added.

"In our view, the transaction should create some merger disruption opportunities," the analysts said.

Prior to the deal announcement, First Horizon already faced obstacles caused by the delay in the integration of its merger of equals with IBERIABANK Corp. First Horizon closed the MOE in July 2020 but did not conclude the integration until February 2022. It led to First Horizon's inability to capitalize on selling new products to existing customers, wrote Christopher Marinac, director of research at Janney Montgomery Scott. Executives attributed the delay to the impact of COVID-19 and other unexpected events, such as Hurricane Ida hitting New Orleans, one of its core markets, in 2021.

Marinac echoed that several banks large and small that compete with First Horizon and the former IBERIABANK across the Southeast and Southwest are possible beneficiaries of the aftereffects of the First Horizon-TD Bank deal, including Ameris Bancorp, Amerant Bancorp Inc., Business First Bancshares Inc., BankUnited Inc., Cadence Bank, Fifth Third Bancorp, Home Bancorp Inc., Red River Bancshares Inc., Simmons First National Corp., SmartFinancial Inc., SouthState Corp., in addition to Pinnacle Financial, Hancock Whitney and Synovus Financial.

Surprising deal that makes strategic sense

Several analysts said they were surprised to see First Horizon pursuing a sale at this time. First Horizon also fetched a valuation above recent deal premiums, with the purchase price representing about 2.1x tangible book value at the time of close, Raymond James' Michael Rose, Carl-Harry Doirin and Joseph Yanchunis wrote.

"Surprised [First Horizon] is selling now given unrealized earnings growth potential between higher rates, leveraging elevated levels of excess cash and synergies from the [IBERIABANK] deal," Wedbush Securities' analysts Peter Winter, David Chiaverini and Brian Violino wrote in a report Feb. 28.

A deal at this time also means that TD Bank will have to correct the inherited challenge of First Horizon's lack of execution on data systems following the IBERIABANK merger, Janney's Marinac wrote.

Nevertheless, the deal announcement presents solid strategic rationale, analysts said. Besides geographical expansion, TD Bank can also add a few countercyclical businesses, such as First Horizon's fixed-income capital markets business and the mortgage business, analysts at Bank of America said in a report.

"While we are a bit surprised by the deal, rumors around a larger U.S. bank deal have swirled for years, where [First Horizon's] recently expanded footprint following the [IBERIABANK] merger of equals in July 2020 expanded its footprint, bolstered its franchise value, and increased its takeout appeal," Raymond James analysts wrote.

First Horizon is notably asset sensitive and likely a big beneficiary to upcoming higher interest rates, Keefe Bruyette & Woods' Brady Gailey, Wood Lay and William Jones wrote. "We've long favored [First Horizon]'s strong Southeast franchise and attractive valuation while the timing is somewhat surprising given [First Horizon] just converted its IBKC deal last weekend, we understand why TD wants [First Horizon]," the analysts wrote.

One negative side of the strategic aspect of this deal is that TD Bank will not materially add significant capabilities to its offering in wealth management, digital and other fee-generating businesses and will remain "a larger version of itself," Scotiabank analysts Meny Grauman and Daniel Marks wrote.

Regulatory scrutiny anticipated

Analysts anticipated that the scale of this deal will add complexity to approval process from U.S. regulators, who have heightened attention on reviews of bank M&A. But TD Bank appears to have made efforts on preserving the merit of community banking, which could help tackle regulators' criticism on big bank M&A hurting underserved communities, analysts said.

TD Bank said it will not close any of First Horizon's banking centers as a result of the transaction. In addition, TD Bank will invest approximately $494 million into First Horizon upon the closing of the acquisition, and about $150 million of this investment will be used to fund the retention incentive of its employees. This move to retain talent is "perhaps a way to appease regulators," Raymond James' analysts wrote.

The lack of branch closures and the commitment to talent retention partly reflect the new regulatory regime in the U.S., analysts at Bank of America wrote. "The regulators likely want to minimize the impact on local communities from deal making and limit the risk of branch closures in rural communities or markets that are underserved by banks," according to the team of analysts led by Ebrahim Poonawala.

The deal structure is also designed to help shareholders to buffer risks, considering some of the deals announced in the U.S. over the last year faced delays in their regulatory approval process. According to the deal agreement, TD Bank will increase the purchase price by 5.4 cents per share each month the merger has not closed, starting Nov. 27, Wedbush analysts noted. This reflects sensitivity on the part of First Horizon to the delays, according to Bank of America analysts.

Deal outlook

Going forward, consolidation activity among U.S. banks will continue to be fairly steady, but most of the transactions are likely to be smaller and create banks with sub-$100 billion in assets, Truist's Demba and King said in the report.

But the TD Bank deal announcement comes as foreign buyers are potentially coming back into the U.S. market, and it is a positive development for other banks considering a sale, especially those in attractive markets like First Horizon, according to Wells Fargo Securities analysts Jared Shaw, Timur Braziler and Jonathan Rau.