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Fifth Third looks to dominate Chicago business lending with MB Financial deal

Fifth Third Bancorp executives defended a rich acquisition price for MB Financial Inc. by saying the combined bank would become a leader in the Chicago business lending space, serving middle-market borrowers in the metro area.

By deposit market share alone, the pending deal would push Fifth Third to the No. 2 spot in Chicago with $19.4 billion of deposits behind only JPMorgan Chase & Co., which is the market leader by far with $49.4 billion of deposits. Management said on a May 21 deal call that the price of the acquisition was necessary to acquire MB Financial. The deal's valuation carries an earnback period of 6.8 years as calculated by the "crossover" method, and investment bankers have said the market looks for earnback periods of five years or less. In morning trading, Fifth Third shares were down more than 7%.

"There will be questions about the valuation of this firm. … Some may describe the price as a full price," said Fifth Third CFO Tayfun Tuzun. "Let me indicate that we paid the price that the franchise deserves to get paid. This is not a project. This is a very well-run company."

MB Financial CEO Mitchell Feiger said the deal was the result of a competitive bid process while adding that the outcome was heavily influenced by lengthy discussions with Fifth Third about the future of the combined company. Additionally, Feiger said the decision to sell was not influenced by any concerns about an economic downturn or any weakness in the bank. MB Financial's shares were up nearly 14% in morning trading.

MB Financial's middle-market business was central to the deal, Fifth Third executives said. Fifth Third CEO Gregory Carmichael said MB Financial has an 11% share of middle-market lending in Chicago and that the combined entity will serve one of every five middle-market borrowers in the metro area. He added that MB Financial's abilities in middle-market asset-based lending and equipment leasing to smaller businesses will provide offerings that Fifth Third can roll out across its entire footprint. Tuzun said MB Financial has focused on middle-market businesses with annual revenue of $5 million to $500 million.

"Our business has tended to be, especially here in Chicago, focused more on the upper end of middle-market to large corporate," Tuzun said. "So that's why we actually had this discussion with our team not too long ago where we identified that gap that exists in our current origination activity. That's why what MB brings to the table here with this transaction is so important because it basically immediately fills that gap."