By Niclas Hallberg and Harvey George (LSE) - Date: 27/02/2019
Overview of the deal
Acquirer: BB&T Corporation (NYSE:BBT)
Acquirer Advisors: RBC Capital Markets
Target: SunTrust Banks, Inc. (NYSE:STI)
Target Advisors: Goldman Sachs
Deal value: $28.24bn
Announcement date: February 7, 2019
At the beginning of February, American retail bank BB&T came out with major news announcing that it will buy its major competitor SunTrust for $28.24 billion. The deal is an all-stock deal where current SunTrust owners will get 1.295 BBT shares for each SunTrust share, representing a mere 7% premium to SunTrust’s share price. The NewCo will be the eighth-largest bank in the US by market cap, standing at an estimated $66bn.
The deal has been framed as a “merger of equals” - 57% of the NewCo will be controlled by current BB&T shareholders and the remaining 43% will be controlled by SunTrust shareholders. Additionally, both banks will get an equal number of the NewCo’s board seats.
The deal is expected to close in the fourth quarter of 2019, but it is subject to regulatory approvals. The view of regulatory authorities’ is uncertain because this deal represents the biggest bank merger in the US since the financial crisis and as such we have a lack of precedent in the sector of deals this size.
Company Details (BB&T)
BB&T is an American bank holding company. Its main businesses are retail banking and securities brokerage. The bank also provides corporate finance and asset management services.
- Founded in 1872, headquartered in North Carolina, US
- Chairman and CEO: Kelly S. King
- Number of employees: 35,852 (2018)
- Market Cap: $39.56bn EV: $67.13bn
- LTM Revenue: $10.99bn LTM EBITDA: N/A
- LTM EV/Revenue: 6.11x LTM EV/EBITDA: N/A
Company Details (Panalpina)
SunTrust is an American retail bank operating on the Southeast of the US.
The bank’s main businesses are traditional consumer banking services such as credit cards and mortgages as well as corporate and private banking services.
- Founded in 1891, headquartered in Atlanta US
- Chairman and CEO: William H. Rogers, Jr.
- Number of employees: 22,899 (2018)
- Market Cap: $29.47bn EV: $42.87bn
- LTM Revenue: $9bn LTM EBITDA: N/A
- LTM EV/Revenue: 4.76x LTM EV/EBITDA: N/A
Projections and Assumptions
Short term consequences
The market was receptive to the news of the deal, both companies’ shares rallied, and indeed SunTrust shareholders had their best intraday return since 2011.
This deal has been widely accepted to make a lot of sense between two so called ‘super-regional’ banks. The potential for quickly realizable cost synergies through consolidating branches, eliminating redundant systems and combining shared services are projected to manifest as $1.6bn in annual operating cost savings by 2022. Further, there is a compelling value creation rationale for the benefit of both companies' shareholders as demonstrated by double-digit earnings per share accretion - GAAP EPS accretion to be 13% by 2021 for each BB&T share, and 9% for each SunTrust share.
Further, there are expected to be significant revenue synergies available for capture through growing complementary businesses. To be explicit, BB&Ts community banking and insurance operation and SunTrust's leading middle market corporate & investment banking business and digital consumer lending platform are all expected to see enhanced focus and growth through leveraging existing client relationships to increase the top-line of these segments.
All-in-all, by the transactions’ advisor’s projections, the merger is expected to generate an internal rate of return of approximately 18%. It will also have a 22% return on tangible equity and the NewCo is projected to have higher profitability than any of the biggest U.S. lenders.
Long term upsides
This merger will create the 6th largest bank in the US measured by assets and deposits. It is also the largest transaction the banking industry has seen since the financial crisis, in particular since BofA bought Merrill Lynch in 2009.
This deal could be the lodestar for the next wave of bank transactions in the modern era. On the tailend of the Trump administration’s ‘deregulation’ of the financial sector and his ‘generous’ tax cuts, the deal may lead way for more consolidation in the industry. This is especially true if, as expected, the merger gets green light from the competition authorities. Indeed, other middle-market banks have the same incentives for M&A activity as BB&T, who pursued this transaction to gain scale and resources to compete more effectively against the torrent of competitive pressure from industry disruptors and larger, more established, institutions such as JP Morgan who have considerably more resources to invest in technology.
More to this point, enhanced financial strength and scale will allow for further investment in transformative technology to enhance the customer experience and to protect against encroaches on market share. This goal is evidenced by the promised creation of a new Innovation and Technology Center in the NewCo’s new headquarters.
Risks and Uncertainties
The combined company will remain comfortably under the asset threshold that would make it a systemically important financial institution, sparing the deal from increased regulatory scrutiny. Moreover, despite the fact that there will be hundreds of instances where BB&T and SunTrust will have branches within a couple of miles of each other, the deal is expected to pass the competition authorities, partly due to the beneficial regulatory environment cultivated by the Trump administration. It also helps that SunTrust has more of a commercial focus and larger clients, while BB&T has a substantial insurance business which differentiates the banks in many regards and makes them less like direct competitors in a handful of markets.
While it is true that BB&T has a history of successful M&A activity, and so with that an experienced management team, this deal proposes a different integration challenge. The deal is being termed a ‘merger of equals’ however that is not entirely accurate. BB&T is technically the acquiring firm, they will own a meaningfully larger portion of the NewCo, they are the surviving stock and their management team will be running the NewCo. With this in mind we could suspect that the ‘merger of equals’ title was used as an obscuring veil to rationalise the meagre premium paid for SunTrust as is usually accepted in ‘merger of equal’ deals. This revelation may cause a rift between BB&T and SunTrust if explicitly identified, which poses integration and cultural issues.
Lastly, because this deal could act as a catalyst for more activity in the banking sector, further deals could displace the NewCo from its position as the 6th largest bank in the US. While there is nothing to be done about this, it is a potential worry for management as they battle heating competition.
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