Mergers aren’t supposed to take that long.
First Citizens BancShares
(ticker: FCNCA) announced that it will buy
) for $ 2.2 billion in October of last year, it seemed like a trivial acquisition.
based in Raleigh, North Carolina, wanted to expand into new markets and CIT, the New York-based finance company, needed to reduce its financing costs. The market agreed it was a good deal – both stocks rose after the announcement – and banks said they expected the merger to go through in the first half of 2021.
Not enough. The merger, which would create one of the country’s 20 largest banks, has been approved by the Federal Deposit Insurance Corp. and the North Carolina Banking Commissioner, but not by the Federal Reserve. It’s now been over 420 days, making it one of the five longest bank mergers since 2010, much longer than the average deal, which on average takes less than six months. The lack of closure has been a surplus for shares of First Citizens and CIT as investors wait for the uncertainty to pass. There’s still a good chance that will be the case, and when it does, the First Citizens stock looks set to pick up.
“Ultimately, we continue to believe the stock is positioned to benefit from the synergies of the deal,” said Kevin Fitzsimmons, analyst at DA Davidson, who rates First Citizens a Buy with a price target of 1,000. $, about 30% above recent level.
To understand why, it’s best to go back to the beginning. When the deal was announced, CIT shares rose 27%, which is not unusual for an acquired company. But shares of First Citizen, the acquirer, rose 11%, which is much more unusual, in large part because the deal makes a lot of sense to both companies. CIT has higher financing costs than its peers, resulting in a return on equity of just 1.4%, an issue that First Citizens, with its cheaper deposit sources, can solve, the analyst says. from Autonomous Research, Brian Foran. In return, CIT provides First Citizens access to specialized commercial loan lines such as railway financing and equipment rentals, while strengthening the presence of First Citizens in California, where CIT has 64 branches but First Citizens only has 17.
It’s unclear what delayed the Fed’s approval. Some fear this could lead to more bank branches being closed, which regulators seek to avoid. Others suggest this is the result of an anonymous letter sent to the Richmond Fed alleging violations of antitrust rules by early citizens, which also does not help this case.
Yet the letter, dated February 11 and discovered by S&P Global, was sent during the normal public comment period and was known to FDIC and North Carolina regulators before approving the deal, Craig said. Nix, CFO of First Citizens, in the company’s latest statement. results announcement on October 27. First Citizens CEO Frank Holding continues to say no regulatory issues were raised, but the bank’s stock fell 3.1% on September 30 when the estimated completion date of the agreement was postponed to early March 2022, while CIT stock also fell 3.1%.
The First Citizens-CIT merger isn’t the only bank merger that has been delayed, albeit the longest. The combination of
People’s United Financial
(PBCT) was suspended for nine months, although regulators in New York and Connecticut states approved the merger, while
New York Community Bancorp
(NYCB), which expected its merger with
(FBC) due to be completed this year, extended the closing date to next year.
These delays suggest that the problem is with the Fed itself. President Joe Biden has reappointed Jerome Powell as head of the central bank, but two vacancies remain on the seven-member Fed board he needs to fill. One of them is the former chairman of the banking supervision committee, Randal Quarles, whose term expired in October and who is leaving the Fed this month. The expiration of Richard Clarida’s term in January will open a third place.
With so many openings – and Powell has yet to be confirmed by the Senate – the Fed may be reluctant to push through the deal. “If the Fed were really waiting for a reconfirmation announcement from Powell to sign certain agreements, like CIT-First Citizens, the approval could come soon,” says Ian Katz of Capital Alpha Partners. “However, the Fed board might feel more comfortable waiting for Powell to be reconfirmed by the Senate, which we expect to happen in January.”
Autonomous Research’s Foran estimates that early citizens would earn $ 80 to $ 85 per share if the deal goes through, up from the currently estimated $ 76.28 in 2022, and that earnings would be closer to a range of $ 95 to $ 100. per share if interest rates rise by one percentage point. Foran believes the stock would trade between $ 960 and $ 1,020, or about 12 times earnings. Early Citizens are expected to gain 24% from Tuesday’s $ 772 close to even hit the low end of that range.
But even if the deal is not approved, First Citizens would have to agree, if only for the sole reason that it was doing very well before seeking to acquire CIT. Its stock has brought in 16.7% per year over the past five years, much better than the
SPDR S&P regional bank
7.2% return on exchange traded funds (KRE). Stocks trade for just 10.3 times 12-month futures earnings, far cheaper than the ETF’s 13.4 times.
“The bank already has a core business,” says Christopher Marinac, analyst at Janney Montgomery Scott. “They don’t need the merger to be successful.
But it would definitely help.
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