It is no secret that Bharat Masrani, CEO of Toronto-Dominion Bank (TD -0.78%), has long wished for his institution to acquire a bank in the southeastern U.S. It looks like Masrani could get his wish: TD Bank recently announced its intention to buy First Horizon (FHN -0.85%) for $13.4 billion in cash, its largest acquisition ever.
First Horizon's $89 billion of assets would catapult TD Bank's U.S. franchise to roughly $614 billion in assets, making it the sixth-largest bank in the U.S.
While Toronto-Dominion Bank certainly paid up to get First Horizon, the deal looks like it could greatly help expand the already-attractive TD Bank franchise into some fast-growing markets. But before the bank can reap any of the benefits, it has some considerable hurdles to clear.
Image source: Getty Images.
What is the opportunity?
Toronto-Dominion already has a strong U.S. presence, with the bulk of its footprint stretching from Maine to Maryland. First Horizon will bulk up that presence in Virginia, the Carolinas, and Florida, and give the bank immediate scale in Tennessee and Louisiana. It will also give TD a new presence in states like Georgia, Alabama, and Texas. Overall, population growth in First Horizon's markets is expected to be 50% faster than the national average.
Image source: TD Bank investor presentation.
The pro forma bank will have a total commercial loan portfolio of nearly $128 billion. This really turns TD into a national competitor when it comes to commercial lending. Top commercial lenders in the U.S. include Bank of America, Wells Fargo, and U.S. Bancorp. Their total commercial loan books range from about $143 billion to $517 billion, so this deal will give TD the scale it needs to build out a national commercial franchise. Furthermore, First Horizon brings some nice capabilities in asset-based lending, warehouse lending, fixed-income trading, and wealth management that TD expects to capitalize on.
TD Bank expects the acquisition to boost its earnings by more than 10% in its fiscal 2023. It expects to generate synergies by eliminating about one-third of First Horizon's expense base.
The hurdles to closing this deal
The $13.4 billion purchase price values First Horizon at 210% of its tangible book value -- the measurement of what a bank would be worth if it were liquidated. That's a very strong valuation. And there is also a clause in the deal that says if TD doesn't close the acquisition by Nov. 27, it will have to pay an additional $0.65 per share on an annualized basis from that date to whenever it gets completed.
Bank mergers have recently come under greater scrutiny by the Federal Reserve, and some officials and lawmakers in Washington have been taking a more jaundiced view toward large bank deals. While none of them have yet been outright rejected by regulators, many have missed their anticipated closing dates as a backlog has developed at the Fed, so it's far from guaranteed that this deal will close on schedule.
The other interesting thing about this deal is that while the 33% in expected cost savings is a significant number, those savings are not expected to be fully realized until 2025, which is a long time in the world of banking. The reason for this appears to be that, unlike what occurs in many bank acquisitions, TD is not planning to close any of First Horizon's branches or banking centers -- at least, not yet. Instead, most of the cost savings are expected to be generated on the technology front. TD plans to convert several of the core systems that power First Horizon's daily operations over to its own systems.
In fact, this might partially explain why First Horizon is selling itself in the first place. It completed a merger of equals with IberiaBank in 2020. Then, at the start of 2021, it started to move some of its products and systems over to a more modern core processing system. That seems like an odd project to begin, given its complexity, if management intended to sell the bank in the near future. It's possible that the technological transition may have been more difficult than First Horizon management anticipated.
"There are certain platforms in certain areas where integration is easier, and we'll be able to realize that in the shorter window," said Leovigildo Salom, head of U.S. retail banking at TD, "... [but] when we talk about the fully realized synergies, obviously, the core platforms become the sort of long pull in that discussion."
How to make the deal a winner
TD Bank is a strong operation, and it is acquiring a bank that will give its U.S. franchise -- including its commercial lending business -- significantly greater scale. Masrani has been looking for a deal in the Southeast for some time, so this doesn't seem like a rash decision. But to make this deal a success, TD must start by closing it on schedule, both to avoid the penalty and to prevent any delays in beginning its cost-cutting initiatives. It is already expected to take until 2025 to realize the full cost synergies, and shareholders may get frustrated with delays beyond that. The journey will not be short nor easy, but I do see the deal being a plus for TD Bank if it can integrate its new acquisition with minimal issues along the way.
