HCBK (MM)

M&T Bank Corp. (MTB) has agreed to take over Hudson City Bancorp Inc. (HCBK), in a cash and stock deal worth $3.7 billion, based on M&T’s closing stock price last Friday. The bank deal, the largest this year, would lead to an expansion of M&T Bank’s franchise in the eastern U.S. and give it the fourth largest deposit share in New Jersey.

As part of the deal, M&T will gain Hudson City’s 135 branch offices sited at New Jersey, New York and Connecticut. Including M&T Bank’s existing branches, the deal would lead to a combined network of 870 branches ranging from Connecticut to Virginia with little overlap.

The deal is projected to add around $25 billion in deposits and $28 billion in loans to M&T, prior to acquisition accounting adjustments. Notably, M&T has $80.8 billion in assets currently, while Hudson City has $43.6 billion in assets.

We believe the deal to be a strategic fit for M&T. It is projected to add to M&T’s earnings per share and capital ratios on an immediate basis.

Deal Details

As per the deal terms, each Hudson City share will get consideration valued at 0.08403 of an M&T share in the form of either M&T stock or cash. Whether cash or stock consideration will be received will depend on the Hudson City shareholder election. However, it is subject to the agreement term that calls for M&T’s total payment to be split in 60% its common stock and 40% cash.

Following the merger, M&T intends to pay back Hudson City’s $13 billion long term borrowings by liquidating its investment portfolio. The Boards of Directors of M&T and Hudson City have approved the deal and await regulatory as well as shareholders’ approval. Following the deal closure, Hudson City Chairman and CEO, Ronald E. Hermance, Jr., will join the Board of Directors of M&T and its main subsidiary, M&T Bank.

JPMorgan & Chase Co. (JPM) served as the financial adviser for Hudson City, while Sullivan & Cromwell LLP advised on the legal aspects. M&T got Evercore Partners service relation to the transaction while Wachtell, Lipton, Rosen & Katz acted as its legal adviser.

Our Viewpoint

Following the financial crisis, the market witnessed a surge in the number of distressed banks ready to be taken over by their stronger counterparts and M&T capitalized on such opportunities. In fact, strategic acquisitions have been a part of M&T’s endeavor to augment its business.

This particular deal opens up significant opportunities for M&T to augment its top line by leveraging Hudson City’s retail network as well as product and balance sheet diversification.

In the past, the purchases of Provident and Bradford in May 2009 in the Mid-Atlantic region have proved worthy, both in terms of customer base and profitability. Moreover, in 2010, M&T purchased K Bank, Randallstown, Maryland through an FDIC assisted deal. The deal helped the company in expanding its network in the Mid-Atlantic region.

In 2011, the company completed the acquisition of Wilmington Trust. The deal provided M&T a leading deposit market share in Delaware and is expected to boost the company’s earnings going forward. We believe such opportunistic acquisitions poise M&T well for growth in the future.

With a solid business model, we believe that M&T is well poised for future growth. While the sluggish economic recovery, regulatory issues and low interest rates remain the headwinds for M&T Bank, we believe that a sound capital position, along with a growing core deposit, will uphold it in the long run.

On the other hand, with the interest rates remaining at near-historic lows and increasing competition for mortgage loans due to the unprecedented involvement of government sponsored enterprises, it had become increasingly difficult for Hudson City to augment its business gainfully. The company also resorted to balance sheet restructuring initiatives.

The deal has been viewed favorably by the market. Shares of M&T rose 4.6%, while Hudson City’s share price moved up 15.68% during yesterday’s regular trading hours on the New York Stock Exchange.

The shares of M&T Bank Corp. retain a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we have a Neutral recommendation on the stock.

 
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