BB&T’s $28.4bn acquisition of SunTrust

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 competi