Why This Company Looks Poised to Continue Growing
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F.N.B. Corporation's (NYSE: FNB) recent announcement that it would acquire Baltimore County Savings Bank (NASDAQ: BCSB) did not come as a surprise to many market-watchers. The Hermitage, Pennsylvania-based bank holding company remains in the throes of an expansion in the mid-Atlantic region of the United States, and it has announced or completed four noteworthy acquisitions since 2010. Unlike many bank holding companies, F.N.B. seems to be content to forgo organic expansion in favor of an acquisition-focused approach.
Although this specific deal is not particularly large, it offers a sizeable arbitrage premium and has several noteworthy attributes. Short-term investors and arbitrageurs should be particularly enthusiastic about it. However, some lingering doubts about the deal's viability remain. Although F.N.B. expects the deal to go through by the end of the first quarter of 2013, this timeline is subject to change. Investors should carefully investigate this situation before establishing a position in either of the companies involved.
The Banks at a Glance
F.N.B. and BCSB compete with a number of other regional banks that do business in the Rust Belt and mid-Atlantic regions of the United States. They must also contend with national players like PNC Bank (PNC) and Bank of America (BAC). However, their most robust regional competitor is probably Columbus, Ohio-based Huntington Bank (NASDAQ: HBAN). A brief financial comparison between these three companies is appropriate.
With just over a dozen branches in the Baltimore metro area, BCSB is the smallest of the three firms. In the wake of the buyout offer, the company has a market capitalization of just under $70 million. For comparison, F.N.B. has a market cap of more than $1.5 billion. Huntington Bank's valuation comes in at just shy of $6.5 billion. However, it is important to note that Huntington Bank has far more branches and does business in a wider geographical area than its peers.
In 2012, BCSB earned $1.7 million on revenues of about $20 million. This compares to a more robust take of $117 million on revenues of $476 million for F.N.B.. Huntington exceeded both of these figures with a profit of $607.6 million on a total take of $2.7 billion. Unlike many of their peers, these three banks have avoided serious debt problems. In fact, BCSB has just $17 million in outstanding debts to offset an attractive cash hoard of $45 million. F.N.B. has a more typical balance of $1.3 billion in debt and $213 million in cash. Huntington carries about $2.5 billion in debt and $1.4 billion in cash on its books.
How the Deal Is Structured
The terms of this all-stock deal are straightforward. On the closing date, BCSB shareholders will receive 2.08 shares of F.N.B. stock for every single share of BCSB that they own. F.N.B. estimates that this offer will take place at a price point of roughly $23.77 per share. Relative to BCSB's current stock price of $21.80, this represents a premium of about 9 percent. However, a sustained fall in F.N.B.'s share price could reduce this figure by a substantial amount.
Potential Complications and Legal Issues
It would be premature to celebrate this deal's completion. The matter must still be subjected to a full shareholder vote, and its pricing has attracted unwelcome attention from a number of shareholder-rights law firms. Although no lawsuits have yet been filed, a preliminary legal investigation has been launched to determine whether BCSB's board was sufficiently diligent during the pre-deal shopping period. It is too early to say for sure that the deal will fall through. However, its very high arbitrage premium suggests that shareholders are wary of its "fine print." Investors who wish to play it directly should take steps to protect themselves in the event that it does collapse.
F.N.B. Corporation's Ongoing Expansion Plans
While its deal with BCSB will produce considerable synergies and improve its position in the competitive Baltimore market, this transaction is a relatively small part of F.N.B.'s overarching growth strategy. Over the past several years, the company has acquired banking properties in the Baltimore, Pittsburgh and Cleveland metropolitan areas. In addition to its recent acquisition of Maryland's BankAnnapolis, the company also picked up Ohio-based Federal Savings Bank and a Pittsburgh-area bank known as Parkvale Financial. Collectively, these deals have added tens of millions of dollars to its top-line revenues and provided it with access to thousands of new customers.
Can Investors Profit?
For F.N.B., this deal offers synergies, revenue support and market expansion. Most pertinently, it builds on the company's recent foray into the Baltimore area and may permit F.N.B. to merge some of the assets of BCSB and BankAnnapolis. It also allows F.N.B. to reduce its exposure to economically weak cities in northeastern Ohio and western Pennsylvania.
For investors, this situation offers a significant arbitrage premium and a juicy dividend yield of nearly 4.5 percent. It also provides investors with a legitimate chance to profit from F.N.B.'s future successes. Given the firm's aggressive approach to growth, it seems likely that more acquisitions are in the cards. However, investors who wish to play this deal with a long position in BCSB should be aware of its potential risks. As always, it is crucial that interested investors investigate the legal issues that surround this deal before pulling the trigger.
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Mike Thiessen has no position in any stocks mentioned. The Motley Fool owns shares of Huntington Bancshares. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!