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Fed Okays Fifth Third (FITB)-MB Financial (MBFI) Merger

Zacks Equity Research
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On Wednesday, Fifth Third Bancorp FITB, headquartered at Cincinnati, OH, received the Federal Reserve’s approval to complete the acquisition of Chicago, IL-based MB Financial, Inc. MBFI. The deal was entered into in May 2018, per which the former had agreed to be merged with the latter, for a total value of $4.7 billion.

Previously, in September 2018, MB Financial’s common shareholders accorded their assent to the agreement. Notably, MB Financial’s preferred shareholders’ votes did not account for two-thirds of the total votes casted in favor of the merger. As a result, now the company will not be merged into Fifth Third’s existing subsidiary and instead, will become an independent subsidiary.

The combined entity will form the fourth largest bank in Chicago, in terms of deposits, with a 6.5% market share. However, shares of Fifth Third have depreciated 15.9%, since the announcement, as investors’ concerns were visible on the deal value which seems to be highly priced as per market sentiments.

The merged entity will stand second in estimated retail deposits and acquire 20% share of middle-market relationships in Chicago.

Terms of the Deal

Per the deal, each common shareholder of MB Financial will get $54.20 of total value, based on the closing price of Fifth Third as on May 18. Notably, the total value indicates a premium of about 24% to share price of MB Financial as of May 18.

The consideration includes stock equivalent to 1.45 of per Fifth Third share and $5.54 in cash for every MB Financial share held. The deal has been agreed upon 90% stock and 10% cash.

Per the terms, two members of MB Financial’s board of directors might join the board committee of Fifth Third, on the deal’s closure.

MB Financial, with about $20 billion in assets, serves middle-market customers as a leader with its strong deposit franchise, customer-centric corporate culture and commercial expertise. On completion of the merger, MB Financial’s strengths and Fifth Third’s huge corporate lending, capital markets, wealth management and the payments business will benefit customers with the complementary capabilities of both banks.

After-Effects of the Deal

This strategic-fit deal for Fifth Third comes with some financial benefits as well. The merged entity is expected to record an IRR of about 18.5% and be accretive to Fifth Third’s operating EPS in the first year. Moreover, accretion of about 7% is projected in the second year, on realization of full cost savings.

Per Carmichael, this merger is expected to speed up achieving NorthStar financial targets and might improve the prior guidance as well.

Furthermore, the deal will reduce Fifth Third’s regulatory common equity Tier 1 (CET1) ratio by nearly 45 basis points. The pro forma tangible common equity to tangible assets (TCE) ratio of the combined entity is estimated to be 8.2%.

Bottom Line

We believe the latest acquisition is a befitting one that will support Fifth Third’s future prospects in commercial banking. Post merger, the bank will be able to cater smaller commercial clients, along with the existing large corporate clients, in the highly competitive Chicago market.

The company’s repositioning and restructuring efforts, which are still underway, help it reallocate the capital into core markets. Additionally, its focus on cost control and efforts to boost long-term profitability are anticipated to augur well.

Currently, Fifth Third carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other banks, M&T Bank Corporation MTB and Enterprise Financial Services Corporation EFSC are worth considering with a Zacks Rank #2 (Buy) and Zacks Rank #1 (Strong Buy), respectively. Both banks have been witnessing upward estimate revisions, for the last 60 days.
   
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Fifth Third Bancorp (FITB) : Free Stock Analysis Report
 
M&T Bank Corporation (MTB) : Free Stock Analysis Report
 
Enterprise Financial Services Corporation (EFSC) : Free Stock Analysis Report
 
MB Financial Inc. (MBFI) : Free Stock Analysis Report
 
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