Bank of Montreal (BMO), Canada's fourth-largest bank in assets,
said it's buying Milwaukee, Wis.-based lender Marshall & Ilsley
Corp. (MI) in a share swap valued at US$4.1 billion, making a
long-anticipated move to expand its operations in the U.S.
BMO said Friday that, under the definitive agreement, it's
offering 0.1257 of a share for each M&I share. Based on BMO's
closing stock price in Toronto Thursday of C$62.05, the deal values
M&I at US$7.75 a share, a 34% premium to its closing price
Thursday. To keep capital strong after the acquisition, the bank
plans to issue an additional C$800 million in equity before the
deal closes prior to July 31, 2011.
BMO will also repay around US$1.7 billion that M&I received
from the U.S. government's Troubled Asset Relief Program.
The purchase bolsters BMO's position in the Midwestern states,
where it's operated Chicago-based Harris Bank since 1984. The
acquisition, which makes BMO the 15th-largest U.S. bank in assets,
nearly doubles BMO's deposit base in the U.S., to US$92 billion,
and more than doubles BMO's branches in the U.S., to 695. It also
marks BMO's biggest deal since buying Harris 26 years ago. BMO,
which was Canada's No. 2 bank just 12 years ago when it wanted to
merge with Royal Bank of Canada (RY), the country's largest lender,
has struggled since then to formulate a clear growth strategy since
the Canadian government nixed domestic bank mergers.
"BMO had to do something. They've been in the Midwest for a long
time, and this is the time to take the plunge," said John Kinsey,
who helps manage C$1 billion at Caldwell Securities Ltd. in
Toronto. "The U.S. is extremely competitive, and most Canadian
companies have not fared well at all in the U.S. So, there may some
execution risk. Let's see how they handle it. It could be kudos to
them if it works."
BMO shares dropped sharply amid concern over the bank's ability
to integrate M&I and expand in the U.S. where the economy has
been weak.
In Toronto Friday, BMO is down C$3.90, or 6.3%, to C$58.15 on
more than 9.1 million shares. In New York, M&I is up US$1.02,
or 18%, to US$6.81.
The acquisition is the latest in a string of U.S. purchases by
Canadian banks, which have weathered the financial crisis and
recession far better than most of their peers to the south. Unlike
many U.S. banks, Canada's lenders didn't require any bailout money,
largely avoiding the subprime mortgage crisis thanks in part to
conservative lending practices and tighter regulation. Canadian
banks are also required to hold more capital than U.S. lenders. The
World Economic Forum has ranked the Canadian banking industry the
world's soundest for three straight years.
BMO's deal is the largest takeover of a U.S. bank since PNC
Financial Services Group Inc. acquired National City Corp. for
US$4.86 billion in October 2008, according to Dealogic. It's also
the biggest for a Canadian bank in the U.S. since rival
Toronto-Dominion Bank (TD) bought Commerce Bancorp Inc. for US$8.7
billion in October 2007. This year, TD acquired Greenville,
S.C.-based South Financial Group Inc. and three Florida banks from
the Federal Deposit Insurance Corp. TD now has more branches in the
U.S. than in Canada. RBC, which lost its triple-A rating this week
from Moody's Investors Service because of concern over its growing
global capital-markets business, has struggled with its U.S. retail
bank.
BMO intends to expand through tuck-in acquisitions and organic
growth in the U.S. after completing the M&I deal. Earlier this
year, BMO also bought Rockford, Ill.-based Amcore Bank NA in a
FDIC-assisted deal that extended its reach in Illinois and
Wisconsin.
"I think within the footprint, there are plenty of
opportunities," said BMO Chief Executive Bill Downe in an
interview. "We can grow more in Indiana, obviously Missouri and
Kansas. We have a strong presence in Illinois and Wisconsin. Even
in the major urban areas, where we currently are, there are
neighborhoods where the competitive environment is going to favor
us doing both tuck-in and maybe some selective branch
openings."
The transaction came together in the last two months, although
the two lenders have been familiar with each other for the past
decade, Downe said.
M&I, the largest bank in Wisconsin, has 374 branches in
Arizona, Missouri, Indiana, Florida, Kansas and Minnesota and about
US$52 billion in assets. BMO has 321 branches in the U.S. and
US$110 billion in assets. The acquisition "transforms our U.S.
business," Downe said on a conference call.
The U.S. regional lender in October reported its eighth-straight
quarterly loss as revenue fell and a drop in its loan-loss reserve
wasn't enough to lift it into the black. It has seen its results
improve of late, though not as much as some other banks.
"M&I is a very well run bank that got caught up in the real
estate downdraft," Downe said.
BMO intends to divest much of M&I's real estate portfolio
and has a team working on segregate out its non-performing loan
portfolio, he said.
M&I's retail, or consumer, loans represent about 30%, or
US$11 billion, of M&I's US$40 billion loan portfolio, while
commercial loans account for 41%, or US$16 billion. The remaining
30%, or US$12 billion is commercial real estate loans, of which the
developer portfolio is about 9%, or US$3.5 billion, BMO said. The
developer portfolio, which was more than US$9 billion three years
ago, has declined steadily. BMO has estimated future losses at
US$4.7 billion, or just under 12% of the total portfolio, mostly
from commercial real estate.
The Toronto-based bank expects the acquisition to be accretive
to earnings in 2013, excluding one-time merger and integration
costs of about C$540 million. The purchase is expected to generate
annual cost savings of about C$250 million, which would be fully
phased in by the end of fiscal 2013.
In an interview, Downe downplayed concerns of integration risk,
saying that the businesses "are very complementary."
"It's clear to us that there will be duplication in corporate
functions, but not in the front line, and that's something that
will help us bring the businesses together and I think we will be
able to capitalize on economic growth and see growth in both banks
as a consequence," he said.
The transaction is expected to lower BMO's fourth-quarter 2010
pro-forma Basel III Tier 1 capital ratio to 8.9% from 10.4%, while
Basel III common equity ratio falls to 6.7% from 7.8%. On a Basel
II basis, the Tier 1 ratio falls to 11.7% from 13.4% and the common
equity ratio declines to 9.2% from 10.3%.
On closing, M&I Chairman and Chief Executive Mark Furlong
will become chief executive of the combined U.S. personal and
commercial banking business, based in Chicago. Ellen Costello will
become chief executive of Harris Financial Corp. and BMO's U.S.
country head.
BMO Capital and JPMorgan Securities acted as Bank of Montreal's
financial advisers, while its legal advisers were Sullivan and
Cromwell LLP and Osler Hoskin & Harcourt LLP. Cravath, Swaine
& Moore LLP represented JPMorgan Securities. BofA Merrill Lynch
and law firms Wachtell, Lipton, Rosen & Katz and Godfrey &
Kahn acted for M&I.
-By Caroline Van Hasselt; Dow Jones Newswires; 416-306-2023;
caroline.vanhasselt@dowjones.com
(Carolyn King and Nathan Becker contributed to this
article.)
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