Bank of Montreal (BMO), Canada's fourth-largest bank in assets,
said it's buying Milwaukee, Wis.-based lender Marshall & Ilsley
Corp. (MI) in a share swap valued at US$4.1 billion, making a
long-anticipated move to expand its operations in the U.S.
BMO said Friday that, under the definitive agreement, it's
offering 0.1257 of a share for each M&I share. Based on Bank of
Montreal's closing stock price in Toronto Thursday of C$62.05, the
deal values M&I at US$7.75 a share. To keep capital strong
after the acquisition, the bank plans to issue an additional C$800
million in equity before the deal closes prior to July 31,
2011.
BMO will also repay around US$1.7 billion that M&I received
from the U.S. government's Troubled Asset Loan Program.
The purchase bolsters BMO's position in the Midwestern states,
where it's operated Chicago-based Harris Bank since 1984. The
acquisition, which makes BMO the 15th-largest U.S. bank in assets,
nearly doubles BMO's deposit base in the U.S., to US$92 billion,
and more than doubles BMO's branches in the U.S., to 695. It's the
latest in a string of U.S. purchases by Canadian banks, which have
weathered the financial crisis and recession far better than most
of their peers to the south.
"BMO had to do something. They've been in the Midwest for a long
time, and this is the time to take the plunge," said John Kinsey,
who helps manage C$1 billion at Caldwell Securities Ltd. in
Toronto. "The U.S. is extremely competitive, and most Canadian
companies have not fared well at all in the U.S. So, there may some
execution risk. Let's see how they handle it. It could be kudos to
them if it works."
BMO shares dropped sharply amid concern over the bank's ability
to integrate M&I and expand in the U.S. where the economy has
been weak.
In Toronto Friday, BMO is down C$3.93, or 6.3%, to C$58.12 on
more than 4.7 million shares. In New York, M&I is up US$1.10,
or 19%, to US$6.89.
Milwaukee-based M&I, the largest bank in Wisconsin, has 374
branches in Arizona, Missouri, Indiana, Florida, Kansas and
Minnesota and about US$52 billion in assets. BMO has 321 branches
in the U.S. and US$110 billion in assets. The acquisition
"transforms our U.S. business," BMO Chief Executive Bill Downe said
on a conference call.
"It's been a natural for us to think about Missouri and Kansas,
and I would say that the size of the branch network in those two
states, in Kansas is really a toehold, in Missouri is the beginning
of a presence. From our perspective, this solidifies our position
in Wisconsin and Indiana, really strengthens that part of the
footprint and I think Missouri and Kansas are little bit of a
bonus," he said.
The U.S. regional lender in October reported its eighth-straight
quarterly loss as revenue fell and a drop in its loan-loss reserve
wasn't enough to lift it into the black. It has seen its results
improve of late, though not as much as some other banks.
"M&I is a very well run bank that got caught up in the real
estate downdraft," Downe said.
BMO intends to divest much of M&I's real estate portfolio
and has a team working on segregate out its non-performing loan
portfolio, he said.
M&I's retail, or consumer, loans represent about 30%, or
US$11 billion, of M&I's US$40 billion loan portfolio, while
commercial loans account for 41%, or US$16 billion. The remaining
30%, or US$12 billion is commercial real estate loans, of which the
developer portfolio is about 9%, or US$3.5 billion, BMO said. The
developer portfolio, which was more than US$9 billion three years
ago, has declined steadily. BMO has estimated future losses at
US$4.7 billion, or just under 12% of the portfolio.
The Toronto-based bank expects the M&I acquisition to be
accretive to earnings in 2013, excluding one-time merger and
integration costs of about C$540 million. The purchase is expected
to generate annual cost savings of about C$250 million, which would
be fully phased in by the end of fiscal 2013.
The transaction is expected to lower its fourth-quarter 2010
pro-forma Basel III Tier 1 capital ratio to 8.9% from 10.4%, while
Basel III common equity ratio falls to 6.7% from 7.8%. On a Basel
II basis, the Tier 1 ratio falls to 11.7% from 13.4% and the common
equity ratio declines to 9.2% from 10.3%.
On closing, M&I Chairman and Chief Executive Mark Furlong
will become chief executive of the combined U.S. personal and
commercial banking business, based in Chicago. Ellen Costello will
become chief executive of Harris Financial Corp. and BMO's U.S.
country head.
Earlier this year, BMO bought Rockford, Ill.-based Amcore Bank
NA in a Federal Deposit Insurance Corp.-assisted deal that extended
its reach in Illinois and Wisconsin. It also said earlier this
month when it reported better-than-expected fiscal fourth-quarter
results that it would continue making small "tuck-in" acquisitions
to build its business.
-By Caroline Van Hasselt; Dow Jones Newswires; 416-306-2023;
caroline.vanhasselt@dowjones.com
(Carolyn King and Nathan Becker contributed to this
article.)
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