Sale of Marshall & Ilsley may spawn more regional bank buyouts

(Bloomberg) -- Bank of Montreal's agreement to buy Marshall & Ilsley Corp., parent company of M&I Bank, for about $4.1 billion in stock will double its U.S. deposits and branches and may spark more mergers among regional banks.

Marshall & Ilsley has outlets in Minnesota, Missouri, Indiana, Kansas and Wisconsin. The company has 26 offices in the Twin Cities metro area and one in Duluth.

Bank of Montreal agreed to pay 0.1257 of its own stock for each share of Marshall & Ilsley to expand its Chicago-based Harris Bank, Canada's fourth-biggest lender said today in a statement. The deal values M&I at $7.75 a share, 34 percent higher than yesterday's closing price of $5.79 on the New York Stock Exchange.

"We've been waiting for Bank of Montreal to expand and grow its Chicagoland bank for 25 years," said Tony Demarin, chief investment officer of BCV Asset Management in Winnipeg, Manitoba, which manages about C$250 million ($247 million), including Bank of Montreal shares. "This is a very positive move for the bank."

Canadian banks, ranked the world's soundest for three straight years by the World Economic Forum, have been expanding in the U.S., where companies faltered as the real-estate market tumbled. Toronto-Dominion Bank, the country's second-biggest lender, may reach an agreement to buy Chrysler Financial Corp., the auto-loan company owned by Cerberus Capital Management LP, three people with knowledge of the matter said this month.

THIRD-LARGEST DEAL

Bank of Montreal's takeover would be the third-largest U.S. acquisition by a Canadian bank or insurance company, ranking behind Manulife Financial Corp.'s $10.9 billion purchase of John Hancock Financial Services Inc. in 2003 and Toronto-Dominion's $8.3 billion deal for Commerce Bancorp Inc. in 2007, according to Bloomberg data.

Marshall & Ilsley has posted eight straight quarterly losses while Bank of Montreal has reported six consecutive quarters of profit growth, a recent streak unmatched by Canada's five other large lenders. The Milwaukee-based bank traded as high as $40 in 2007.

"M&I was moving past the problems of the economic downturn, but I think this will be a watershed for both banks," Bank of Montreal Chief Executive Officer William Downe said in an interview. "The combination of M&I and Harris, coming out of the downturn, means that we're well positioned to participate in a healthier economy."

The takeover has a price-to-book ratio of 0.61 for Marshall & Ilsley, less than half of the median ratio of 1.4 for 33 regional, commercial bank deals since the start of 2009, according to Bloomberg merger data.

Bank of Montreal's action will create a wave of regional bank buying as U.S. regulators redefine rules, said Richard Bove, an analyst for Rochdale Securities LLC in Lutz, Florida.

"Now people are afraid someone is going to come along and do something before the regulations are changed," Bove said. "They don't want to be stuck missing the move."

With the purchase, Bank of Montreal more than doubles its U.S. branches to 695, and increases its U.S. assets by 47 percent to $162 billion.

'MAKES SENSE'

"Strategically, the acquisition makes a lot of sense, given the geographic overlap of the core operations, principally Wisconsin and Indiana as well as broadening BMO's scope in other key regions such as Arizona and Florida as well as M&I's focus on mid-market commercial lending," John Aiken, a Barclays Capital analyst, wrote in a note to investors.

Bank of Montreal's purchase makes sense in the long term, even though M&I won't show a profit for 18 months to 24 months, Bove said.

"Since they already owned a bank in Illinois, buying a bank in Wisconsin makes a great deal of sense for them," Bove said in an interview.

Defaults on business and home loans hobbled profit at M&I, with net charge-offs equal to 5.47 percent of average loans and leases during the third quarter. Marshall & Ilsley expanded housing and construction loans in states such as Florida and Arizona, which were among the hardest-hit by the real-estate bust. The lender took $1.72 billion in aid from the U.S. Treasury Department's Troubled Asset Relief Program. Bank of Montreal said in a slideshow presentation that it estimates $4.7 billion of future losses on M&I's real-estate and other loans.

TARP PAYBACK

The Canadian bank agreed to buy preferred shares that the U.S. government acquired as part of its bailout of the Wisconsin lender. The transaction is expected to close before July 31.

"We will do that out of the available resources of the company," Downe said. "There's cash in M&I and cash in Bank of Montreal, so the financing of it is not a significant issue."

Bank of Montreal will raise about C$800 million in shares to help finance the purchase, the largest takeover ever for the Canadian bank. The deal will add to earnings in 2013, excluding merger costs of C$540 million.

Bank of Montreal expanded in the U.S. with its C$718 million takeover of Harris Bank in 1984. The company has spent about C$2.5 billion buying U.S. banks since then, including C$315 million two years ago for two Wisconsin lenders. Bank of Montreal bought Amcore Bank from U.S. regulators, adding 52 branches in Illinois and Wisconsin, in April.

ADDING BRANCHES

Marshall & Ilsley has 374 branches and $38 billion in deposits, and is the largest bank in Wisconsin. The purchase will yield savings of about $250 million and will close in the fiscal third quarter, Bank of Montreal said. M&I CEO Mark Furlong will be chief executive of the combined U.S. consumer banking business, while Ellen Costello of Bank of Montreal will be U.S. country head.

"We will be a formidable competitor together," Furlong said in an interview. "It gives us a wonderful market share in the Midwest and an opportunity to continue to build that market share through acquisitions and through internal growth."

Paulson & Co., the hedge fund run by John Paulson, is the sixth-largest M&I shareholder, according to Bloomberg data.

Bank of Montreal is paying 1.26 times revenue, less than half the 3.17 times revenue for the average purchase of similar- sized U.S. banks, according to Bloomberg data.

JPMorgan Chase & Co. advised Bank of Montreal while Bank of America Merrill Lynch worked with Marshall & Ilsley.