After several big bank deals in 2020, M&T Bank (MTB -2.52%) continued to ride the wave with its recent announcement that it plans to purchase People's United Financial (PBCT) for $7.6 billion. The deal will create a roughly $200 billion-asset bank in the Northeast that forms a triangle between Buffalo, Washington, D.C., and Boston. Not only is the acquisition a huge move for M&T, but it's also the bank's first announced purchase since 2012. Let's take a look at whether this deal makes sense for M&T.
The numbers
M&T said it will buy People's United in an all-stock transaction that values the bank at $17.70 per share, or roughly 164% of tangible book value and 13.7 times People's United's consensus earnings in 2022. The purchase price represents a nearly 13% premium over the share price of People's United on Feb. 19.
The deal is immediately accretive to tangible book value, which is great news. That means when the deal closes, M&T's tangible book value -- or equity after removing intangible assets -- will be higher. Most acquirers in bank deals tend to see their tangible book value get diluted, which can then take years to earn back, so investors usually warm to deals that are immediately accretive.
Image source: Merger investor presentation.
The acquisition will also be accretive to M&T's earnings per share (EPS) once the bank closes on the acquisition. Once again, this means that the EPS of M&T and People's United as a combined entity will exceed the EPS of M&T and People's United on a stand-alone basis. M&T management expects the transaction to be accretive to EPS by 10% to 12% by 2023. Some bank deals announced recently like Huntington Bancshares' acquisition of TCF Financial have yielded more EPS accretion, but that deal was also much more dilutive to tangible book value. When deals are immediately accretive to tangible book value, they tend to come with less EPS accretion.
M&T will achieve these financial results by cutting 30% of People's United's annual expense base, which includes People's United's planned closure of most -- if not all -- of the bank's Stop & Shop branches.The cost savings are pretty good considering M&T and People's United do not have as much branch overlap as one might think, given the two banks' contiguous footprints. M&T plans to spend $740 million in pre-tax, one-time merger expenses.
Does it help the business?
The acquisition of People's United helps M&T expand into New England and create a very dense footprint between Buffalo, Washington D.C., and Boston, where almost everything in the footprint is within a seven-hour drive.
Many of the markets People's United operates in, including its home state of Connecticut, are not fast-growing markets. But this density could be very beneficial down the road for both of these very efficient banks. There could be further cost savings opportunities after the acquisition is closed, and the density will allow M&T to really have a presence in these new markets and continue to deploy its local banking model that has long been a success. M&T Bank will also be able to do some remixing of People's United's balance sheet, running off some higher-cost deposits and putting excess liquidity into higher-yielding assets.
There is also a good opportunity for revenue synergies, which are not currently modeled into M&T's EPS accretion estimates. With such close proximity to one another, both banks should be able to easily access one another's markets and distribution channels to cross-sell their prospective banking products. People's United will give M&T access to lots of small business commercial customers in New England that they already excel with in their own markets. M&T will be able to sell these customers its broader payments/treasury solutions, capital markets capabilities, and trust and wealth management products, all of which drive fee income. Meanwhile, People's United can expand its equipment finance lending capabilities into M&T's markets.
Additionally, People's United comes with great credit quality, averaging very few charge-offs (debt unlikely to be collected and a good representation of loan losses) since 2007. M&T Bank has historically had great credit quality, but saw some deterioration in 2020 when the pandemic hit one of the bank's big markets, New York City, extremely hard. M&T also has 13% of its commercial real estate loan portfolio in the hard-hit hotel sector and decent exposure to construction loans as well. The addition of People's United brings further geographic diversity and reduces the bank's exposure to some of its riskier sectors.
Does the acquisition make sense?
Some investors may not like this deal initially due to several of the slower-growing markets M&T is expanding into, and People's United history of underperformance. But remember, most bank acquisitions involve a strong bank acquiring a weaker bank and fixing it up. The deal is a natural progression of M&T's existing footprint and really puts the bank in a position to be a dominant player the Northeast.
Importantly, the deal is immediately accretive to tangible book value and offers some decent EPS accretion as well. Keep an eye on how successful future revenue synergies are, because M&T Bank's management team really views the deal as a growth story. Once the acquisition is complete, if M&T can significantly grow fee income and really penetrate the New England market, that would turn the deal from good one into a great one.
