Why Hudson City’s Book Value is Misleading
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M&T Bank Corp (NYSE: MTB) announced the acquisition of Hudson City Bancorp (NASDAQ: HCBK) for $3.7 billion in stock and cash, equivalent to $7.22 per share on the day of announcement. This values HCBK at just 0.8x tangible book value. It appears that the street perceived this transaction as undervalued, as MTB shares rallied 5% on the news. However, as I will explain below, the reported 0.8x book value multiple is misleading considering the debt restructuring charges that will be required post acquisition.
Stealth losses from interest rate bets
Hudson City managed to come out of the financial crisis unscathed by subprime loans, yet made a terrible bet on interest rates bottoming out following the crisis. In FY’11, the bank revealed that it had seen an uptick in refinancing of the mortgages it held due to the extended period of low interest rates. This left HCBK with a mismatch in its maturities of the money it had borrowed to loan out to residential borrowers.
HCBK moved to right its asset liability management by restructuring $12.5 billion of the $29.6 billion in long term debt it had with a weighted interest rate of 4.02%. The bank took a $1.9 billion pretax charge, or a 15% penalty to pay them off. However, as of June 2012, the company reported that it still had $15.1 billion of the debt remaining on its balance sheet, although at a slightly better interest rate of 3.87%.
|($ in millions)||Dec-11||Dec-11||Jun-12||Jun-12|
|Amount||Interest rate||Amount||Interest rate|
|Total Long Term Debt||29,675||4.02%||15,075||3.87%|
On the August 27, 2012 acquisition conference call, MTB management stated that it would cost another $2.3 billion to restructure the remaining debt at acquisition. Adding this to the $3.7 billion in consideration MTB will pay for HCBK, the buyout actually occurs at 1.3x tangible book value.
|($ in millions)||Amount||Book Value|
|Hudson City purchase price||3,700||0.80x|
|Debt restructuring charge||2,300||NA|
|Adjusted purchase price||6,000||1.30x|
This valuation is in line with both its acquirer MTB and its direct competitor in the NJ/NY regional banking market, Valley National Bank (NYSE: VLY). So for those of you looking for a competing bid due to the perceived under pricing, I wouldn’t count on it.
|Book Value Multiple|
|Valley National Bank (VLY)||1.28x|
The buyout offer appears to fairly value HCBK given the above comps. Since the deal includes MTB stock, investors should take advantage of the post deal pop in MTB shares by selling ahead of the closing date, which isn’t expected until 2Q’13.
JoeMazzone has a position in Valley National Bank (NYSE: VLY). He has no intention of initiating a position M&T Bank (NYSE: MTB) or Hudson City Bancorp (NASDAQ: HCBK) within the next 48 hours. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.