Amid investor concern about pricing and integration risk, executivesdefended Pittsburgh-based F.N.B.Corp.'s planned acquisition of Raleigh, N.C.-based as a strategicmove that would provide the bank an important new level of scale and attractiveopportunities for long-term growth.
F.N.B.'sstock dropped more than 9% July 21 after it announced the more than $1.4billion all-stock acquisition, the largest in company history and one thatwould push it near $30 billion in assets.
Withthe deal, the bank, from its current footprint, leapfrogs over Virginia andinto North Carolina and Upstate South Carolina. The size of the deal — it marks the seventh-largest whole-bank acquisitionannounced since the start of 2015 — and the geographic jump into a new,unfamiliar market stirred concern among analysts and investors aboutintegration challenges.
Whatis more, the deal came together following a bidding process, F.N.B. executives said on a call with analystsafter announcing the deal. Such processes tend to push up deal values, and F.N.B. did in fact agree to a relatively high pricetag. SNL Financial estimated the deal valuetopped 230% of tangible book. SNL valuations forbank and thrift targets in the Southeast region between July 21, 2015, and the same date this year averaged140.62% of tangible book. F.N.B. estimated it would take about 4.5 years to earn back dilution to tangible book value.Investors in recent years have been wary of earn-back periods longer than fouryears.
"Themarket is quite nervous about this because it is a very big bet for them,"FIG Partners analyst Christopher Marinac said in aninterview. "It is a big, bold bet on a market they have never beenin before."
But F.N.B. executives said on the call with analysts that thetarget is financially strong — Yadkin on July 21 second-quarter net incomeavailable to common shareholders of $17.4 million, or 34 cents per share — andthat it has solid footholds in several coveted growth markets, notablyincluding Raleigh and Charlotte. They also noted that top Yadkin executives,including Presidentand CEO Scott Custer, and several lenders wouldstay with the combined company and provide needed local expertise in theCarolinas.
Executives said F.N.B. is eager to establish strongholds innew, high-growth areas in which it can expand and deepen its customer base,selling more products to each customer. When banks are able to do this, theygrow revenue more efficiently.
"We believe this transaction presents tremendous growthin cross-sell opportunities," Presidentand CEO Vincent Delie Jr. said on the call.
F.N.B. estimated that the acquisition, which is slated toclose in early 2017, would be accretiveto GAAP EPS by 5.5% in 2018 and likely more beyond that point, justifying theprice. They said their projections were conservative and that their duediligence on the financial health and cultural fit of Yadkin were bothextensive, leaving them comfortable that the integration would progresssmoothly. They also noted that, longer term, the combined company's balanceshould prove lower risk because of geographic and asset diversification.
Theyfurther emphasized that the scale they stand to acquire will help them spreadout compliance costs over a much larger base, helping with efficiency. Andwhile the deal is large, F.N.B. hasextensive M&A experience, having managed several bank acquisitions over thelast four years. Yadkin, too, was acquisitive in recent years and its leadersbring to the table valuable integration experience, executives said.
F.N.B. executivesalso said that they likely will circle back to Virginia in the future,connecting the Carolinas to the current footprint. They said they passed overthe state now because pricing expectations from would-be sellers were too high.They expect expectations to moderate in coming years.
Marinac said the merits of the dealare notable and could ultimately make it a positive and transformative move forF.N.B."It's agreat market they go into, but it's also a very competitive market," Marinac said. "What'sgoing to be key is for F.N.B. to go down therewith a really good game plan and to execute."
Gabelli & Co. analyst StevenComery said in an interview that, from Yadkin's viewpoint, the deallooks favorable. Yadkin had cinched deals of its own in recent years to rapidlygrow, but he said appealing small targets in North Carolina had dwindled innumber after a spate of M&A, leaving the bank to gradually approach $10billion in assets via organic means. Comery said most banks want to either stay well below $10 billion, a point at which higher regulatory scrutiny and costskick in, or surge past it with deals. With the latter looking unlikely, andwith the ability to attract a favorable price, he said it made sense for Yadkinto sell.
"Ithink it was the most rational course of action, given their situation," Comery said.