At a recent Lehman analyst conference, Marshall & Ilsley (NYSE:MI) talked about its company, its strategic plans, and the prospects for its upcoming spinoff, Metavante. Value investors' ears should perk up at the word "spinoff," because these ventures tend to be misunderstood, neglected, and generally undervalued. Let's take a look.
Company snapshot
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.
Growth
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 (NYSE:PNC) generates 63% of revenue from fee income.
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.
Catalysts
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.
Valuation
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 (NYSE:FDC) amounted to 14-15 times forward EBITDA, so the Metavante spinoff valuation looks compelling on a relative basis.
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.
Related Foolishness:
- Marshall & Ilsley Brace for Split: Fool by Number
- Bulking Up by Slimming Down
- Synovus: Worth the Effort
First Data is a Motley Fool Inside Value pick. Try any one of our investing services free for 30 days.
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.
