Susquehanna sale nips regulatory excuses for bank M&A, sources say
BB&T’s (NYSE:BBT) planned acquisition of Susquehanna Bancshares (NASDAQ:SUSQ) puts to bed theories that regulators are opposed to sizeable bank mergers, two sources familiar with the matter said.
The Winston-Salem, North Carolina regional bank, long known for its deal-making prowess in the southeast, surprised the market on Wednesday with plans to further expand in the midAtlantic region through a USD 2.5bn stock-and-cash bid for Lititz, Pennsylvania-based Susquehanna.
“This signals that larger banks can make strategic bank deals with the right target,” said Gary Lax, a partner at Luse Gorman Pomerenk & Schick. “Regulators are finding ways to allow deals to happen” if an acquirer does not have regulatory issues, added an industry banker.
The two sources familiar cautioned that the market should not expect a wave of transactions on the back of the Susquehanna deal. Fundamentals still matter and deals have to make strategic sense, one of the sources said.
The Susquehanna deal marks the first time a bank deemed systemically important and subject to regulators’ annual CCAR stress test has proposed the acquisition of a smaller institution subject to a self-administered Dodd-Frank Act stress test (DFAST).
At the end of 3Q14, BB&T had USD 187bn in assets and Susquehanna had USD 18.6bn. CCAR applies for institutions with more than USD 50bn in assets and DFAST is for banks with more than USD 10bn.
BB&T has been among the few large regional banks that have expressed interest in doing deals as many hunker down to improve their compliance systems and earnings. That in turn has allowed some smaller institutions that are sale candidates to hold off on considering deals on the belief there are few capable buyers.
The Susquehanna sale will put pressure on banks in the USD 10bn-USD 20bn asset range to fix their problems now that selling is considered an option, said Rick Childs, a director at accounting firm Crowe Horwath.
“The best alternative for these banks is still to fix their problems to get the best price,” Childs said. “But now shareholders will demand that problems get fixed with a greater sense of urgency.”
The BB&T offer is a 36% premium to Susquehanna's close on Tuesday and values the bank at 1.69x tangible book value or 17x forward earnings per share. After factoring in expected cost savings, the deal is less than 10x EPS, the second source said.
BB&T executives defended the valuation on a call with analysts on Wednesday morning, noting the transaction is more accretive than buying back stock given that BB&T trades at close to 2x tangible book value.
Industry bankers had mixed views on the valuation, with one calling the price high. That banker noted that BB&T has viewed its deal-making ability as a competitive advantage, but M&T Bank (NYSE:MTB) was touting similar experience two years ago, before that institution became locked in a regulatory quagmire as it tried to acquire a New Jersey bank.
BB&T is “ahead of the game” in improving its systems and processes, CEO Kelly King said on the call. Rather than investing to improve its anti-money laundering systems, Susquehanna will be able to use BB&T’s after the deal closed, he noted.
The deal came after a few months of talks between the banks, King said. Given the amount of due diligence involved in a deal, it is challenging for a large bank like Susquehanna to run a sale process, the second source said.
It is unclear, though, if Susquehanna held any talks with other potential buyers. A Susquehanna spokesperson declined an interview request.