Description

This is a relatively straightforward merger arbitrage opportunity with a strong buyer with a powerful strategic rationale.  

First Horizon Corporation (FHN) is a bank holding company which is being acquired by TD Bank for $25 per share.  At the current price of $22.25, the deal offers a 12% premium and a 16% yield to a planned closing in early 2023. FHN will continue to pay quarterly dividends of $0.15, and there is a 2.6% annualized fee that kicks in if the merger is delayed beyond the targeted closing date of November 27, 2022. (Nine months from the announcement date.)

First Horizon is a bank holding company headquartered in Memphis, Tennessee.  FHN operates over 400 banking centers in 12 southern states and New York. FHN had $89 billion of assets at the end of 2021.  TD Bank is a global financial holding company with $1.4 trillion in financial assets.  TD’s two US bank subsidiaries have  a combined $453 billion of assets. TD’s 1150 U.S. branches are primarily in the Northeast, Mid-Atlantic, Metro D.C., and the Carolinas.  This acquisition provides a strong strategic fit for TD as it focuses on its core banking business following the sale of its TD Ameritrade business to Charles Schwab.

The merger requires a variety of regulatory approvals in both the U.S. and Canada. In addition to the usual Hart-Scott-Rodino approvals, FHN and TD are regulated at both the federal and state/provincial levels. The proposed merger will extend TD’s reach into the Southeastern U.S. and will create the nation’s sixth largest bank. Even in Florida, where both banks have branches, the combined institution will have fewer branches than Wells Fargo, BofA, Truist, and Chase.  While regulators will look at concentration on a market by market basis, TD indicates that it does not plan to close any branches as a result of the merger.

There have been a number of mergers that have been opposed on anti-trust grounds by the current administration.  Notably AJRD and CHNG have been challenged by the DOJ as anti-competitve. These were both vertical mergers which drew objections from customers of the target companies.

In the banking space, there have been a number of large mergers that have closed in the recent past:

Acquirer         Target                   $B Announced       Closed         Time

M&T Bank Peoples United        $ 7.6 2/22/21               4/1/22 13 months

Webster Bancorp Sterling Bancshares          5.1 4/19/21               2/1/22 10 months

Citizens Bank    Investors Bancorp          3.5 7/28/21                4/6/22   9 months

Bancorp South Cadence                  2.9 4/12/21               9/29/21           6 months

The only major bank deal that is still pending regulatory approval is US Bancorp’s purchase of MUFG Union Bank for $8 billion. This deal was announced in September 2021, and  management still expects the deal to close in the first half of 2021. Union Bank is based in California, and is currently owned by Mitsubishi UFJ Financial.  The deal has drawn a great deal of interest from “community” groups.

Risks

The major risk here is regulatory delay. Regulations around the the banking industry make it easy for “interested parties “ to delay the process.  It should be noted that HFN has a “satisfactory” CRA rating, and TD has an “outstanding” rating.  Anti-trust should not be a significant issue, as this merger will create the sixth largest bank in the US.  Arguably this merger will improve competition among large banks.

FHN was trading around $17.5 when the deal was announced in February.  Given the weakness in bank stocks over the past few months, I would expect FHN to trade down to $15 to $16 in the event of a deal break.

Catalyst

The stock price should improve gradually as various milestones are met.

Shareholder approval should be obtained on May 31.

Various regulatory approvals will occur over the balance of the year.

Closing in the November 2022 to January 2023 window.