Toronto-Dominion Bank may seek a lower price for First Horizon Corp., but it still has an incentive to close the deal, according to a Canadian asset manager who specializes in financial stocks.
(Bloomberg) — Toronto-Dominion Bank may seek a lower price for First Horizon Corp., but it still has an incentive to close the deal, according to a Canadian asset manager who specializes in financial stocks.
“The reasons they wanted to buy in the first place haven’t gone away. Tennessee and Florida and the Carolinas are still great banking markets,” Robert Wessel, managing partner of Hamilton Capital Partners Inc., said in an interview. “It fits very nicely with the geography of TD’s US platform.”
First Horizon has been trading far below the $25-per-share takeover offer since early March, when the Memphis-based bank said Toronto-Dominion doesn’t expect to receive regulatory approvals for the deal by a May 27 deadline. A little more than a week later, Silicon Valley Bank failed, setting off a crisis of confidence in US regional lenders.
First Horizon was trading at $17.70 late Monday morning, implying that traders believe the deal will fall apart or be repriced lower. Wessel, whose firm manages about C$2.2 billion ($1.6 billion), said a price renegotiation is the “most likely outcome.”
That also fits with the view of analysts such as Paul Holden at CIBC Capital Markets, who argued in a note to clients earlier this month that Toronto-Dominion would need a minimum 10% price cut, to $22.50 a share, to “stay engaged.” If the transaction doesn’t receive regulators’ blessing by May 27, the Canadian bank can walk away simply by not extending, he said.
A spokesperson for Toronto-Dominion declined to comment.
The deal was unveiled in February 2022 and values First Horizon at more than $13 billion.
Canadian bank stocks have held up much better than their US counterparts during the recent market turmoil. The nine-member S&P/TSX Composite Commercial Banks index has dropped about 6% since the beginning of March in US dollar terms, better than the KBW Bank Index and the Bloomberg World Banks Index.
Toronto-Dominion is the second-worst performer of the Canadian bank index in that span with a drop of more than 11%. It was recently the most-shorted bank stock in the world, according to an analysis by S3 Partners.
Investors in Canadian bank shares have been trained to buy the dip after years after strong returns and relative stability, Wessel said. The last institutional failure handled by the Canada Deposit Insurance Corp. was in 1996.
“The Canadian banks over the years have done so well that there is always a category of investors who are interested in buying them when they’ve done poorly,” Wessel said.
Last week, Hamilton introduced a new fund aimed at capturing some of that demand. The Hamilton Canadian Bank Equal-Weight Index ETF, which invests in the country’s six largest domestic banks in equal proportion, is similar to an exchange-traded fund that’s sold by Bank of Montreal’s asset management division and has about C$3.8 billion in assets. The Hamilton fund has a lower management expense ratio.
Hamilton, co-founded by Wessel and Jennifer Mersereau, was the fastest-growing seller of ETFs in Canada in 2022 among firms that ended the year with at least C$1 billion of assets under management. The firm, which goes by the name Hamilton ETFs, took in about C$1 billion in net inflows during the year, according to National Bank of Canada analyst Daniel Straus, despite a difficult year for bank stocks.
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