At a recent Lehman analyst conference, Marshall & Ilsley
Milwaukee-based Marshall & Ilsley is the 19th largest U.S. bank, founded in 1847, with $57 billion in assets and a $19 billion market cap. Currently, 73% of its income comes from banking, 20% from banking and payment technologies and processing through its Metavante unit, and 7% from wealth management.
The company has spent the past half-decade expanding beyond its core Wisconsin market, which accounted for 73% of net income in 2001. Currently, Wisconsin banking only accounts for 38% of income, with non-Wisconsin banking and Metavante becoming bigger pieces of the pie. Marshall also has strong positioning, with top-five deposit-market share, in Wisconsin, Minnesota, Arizona, Missouri, and Florida.
Despite being a lower-key player, Marshall has posted robust 16% and 11% annual loan and deposit growth over the past five years. It's also generated 56% of its revenue from fee income over the past few years. In comparison, highly regarded PNC Financial
Fee income helps insulate a bank from the vagaries of the interest rate curve. Marshall also has a pretty decent handle on its expenses and credit quality, with the expense ratio (excluding Metavante) below average at about 50%, and charge-offs as a percentage of assets in the 10-to-20-basis-point range historically. Both are lower than the industry averages.
M&I's wealth management unit has also shown robust growth from a small base, with assets under management growing 13% annually over the past five years.
A key event in Marshall's near term future is its spinoff of Metavante, which provides banking and payment technologies to financial-service companies. Among other things, it helps banks and trusts with customer account management, and processes payments for credit cards, ATMs, and other transactions.
Metavante will be spun off in a tax-free transaction valued at $2.5 billion, with 75% of shares going to Marshall shareholders and 25% to Warburg Pincus, who is paying $625 million in cash for the stake and providing the capital infusion.
Metavante posted more than $1.5 billion in sales in 2006, and it's expected to grow that to between $1.6 billion and $1.64 billion in the next year. Over the past four years, sales have grown 25% annually, while net margins have improved from 6.7% to 11.4%.
In terms of the mechanics of the spinoff, Metavante will assume $1.75 billion in debt, including roughly $1 billion in existing debt and $750 million from selling debt and paying a dividend back to Marshall.
Metavante's total enterprise value (equity plus debt) is $4.25 billion. According to the conference call, that leaves the spinoff at a 3.5 to 4.0 debt-to-EBITDA ratio. It also implies that the firm can generate $450 million-$500 million in annual EBITDA, which would give it an 8.5 to 9.5 EV-to-EBITDA multiple. Recently, KKR's $29 billion bid for First Data Corporation
According to the call, the spinoff will also give Marshall $1.8 billion in capital, boosting its tangible equity ratio to 9.4%. This would leave the company underleveraged, allowing it to redeploy capital and providing a nice platform for further income growth.
All in all, Marshall's an interesting company; I'd keep an eye on it if shares got a little cheaper. Metavante also looks compelling, and I wouldn't be surprised if the newly solo company becomes someone else's buyout target.
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.