On Friday, bailed out lender Marshall & Ilsley Corporation (MI) announced that it has entered into an agreement with the Canada based Bank of Montreal (BMO) under which BMO will acquire all the shares of M&I in a stock-for-stock deal valued at $4.1 billion.
Under the terms of the deal, M&I’s shareholders will receive 0.1257 share of BMO for each share of the company. The transaction is valued at $7.75 per share or 34% premium to the closing price of the company’s share on December 16, 2010. In addition, BMO plans to raise nearly C$800 million in equity before the completion of the deal.
Additionally, BMO will procure M&I’s Troubled Asset Relief Program (TARP) shares of $1.7 billion and will repay the TARP money before the closure of the deal. BMO will also assume all the long-term liabilities of $5.4 billion and purchase the company’s remaining warrants which are held by the U.S Treasury department as part of its participation in TARP and not repaying the money. Also, in connection with the merger pact, M&I issued an option to BMO, becoming exercisable upon the completion of the deal, to purchase up to 19.7% of the M&I’s shares.
Mark Furlong, Chairman, President and CEO of M&I, would be appointed as the CEO of the combined U.S. Personal and Commercial banking business of BMO, based in Chicago.
The agreement (already approved by the boards of directors of both the companies) is still subject to regulatory approvals and consent from shareholders of M&I and is expected to be closed by July 31, 2011.
The deal, as expected by BMO, would create an annual cost saving of approximately C$250 million and will become accretive to its results in 2013, excluding a one-time merger and integration costs of roughly C$540 million. The internal rate of return on the investment is projected to exceed 15%.
The deal would allow BMO to add $92 billion in deposits and $162 billion in assets. The agreement also will also add 374 branch locations for BMO, taking the total number branches to 695 in the U.S.
The merger will allow BMO to extend its reach in the lucrative U.S. market. BMO had acquired certain assets and liabilities of Rockford, Ill. based Amcore Bank, N.A. from the Federal Deposit Insurance Corporation in April 2010.
Following the announcement of the deal, Moody’s Investors Service, a division of Moody’s Corp. (MCO), notified that it may upgrade M&I’s ratings. Separately, Moody’s also declared that it may downgrade BMO’s Aa2 rating on potential integration challenges.
With M&I reporting losses since the last several quarters, we believe that the merger deal will provide some relief to the investors.
Currently, M&I’s shares maintain a Zacks #4 Rank, which translates into a short-term Sell rating. BMO maintains a Zacks #2 Rank, which translates into a short-term Buy rating.
However, for both M&I and BMO, we have a long-term Neutral recommendation.
BANK MONTREAL (BMO): Free Stock Analysis Report
MOODYS CORP (MCO): Free Stock Analysis Report
MARSHALL&ILSLEY (MI): Free Stock Analysis Report
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