The trend in U.S. mid-cap bank M&A continues, with Huntington Bancshares Incorporated (HBAN) announcing an agreement to acquire FirstMerit Corporation (FMER) for US$3.4 bln. HBAN is paying 1.6x tangible book value in a stock and cash transaction (75%/25%), implying a 31% premium for FMER shareholders as of yesterday’s close. The deal follows a very steep correction in the U.S. banks year-to-date (e.g., BKX down ~18%, KRX down ~17%).
Of note, in 2013, FMER acquired Citizens Republic, which was the subject of our 2011 Mid-Cap Bank Case Study (click here).
Today’s deal highlights why we favour mid-cap banks to their larger peers. The mid-cap banks generally have greater rate sensitivity, lower regulatory risk, and the potential to participate in industry consolidation – as evidenced by a pick-up in deal activity. Although still inexpensive, the “mega-caps” continue to face a tougher regulatory environment, and in the case of the universal banks, a difficult capital markets environment.
The deal is anticipated to be accretive to 2017 earnings, ex-merger costs, and 10% accretive to 2018 earnings after all synergies are implemented. The two companies currently have significant geographic overlap across the U.S. Midwest and the acquisition will create the largest bank in Ohio. Post-acquisition, HBAN will have ~$100 bln of assets, after the inclusion of ~$25 bln of assets currently held by FMER.