By Nikhil Subba
(Reuters) - U.S. regional bank Fifth Third Bancorp (FITB.O) has agreed to buy smaller rival MB Financial Inc (MBFI.O) in a stock-and-cash deal valued at about $4.7 billion (£3.5 billion), as it looks to expand in Chicago and broaden its middle market customer base.
A windfall from last year's Republican tax overhaul has encouraged more investment among mid-sized U.S. lenders and banks are also hopeful that legislative moves to roll back some rules on capital requirements will free up more cash.
That runs contrary to several years of minimal merger activity in the sector due to stricter rules set in place after the 2008 financial crisis, which limited expansion.
As part of the deal announced on Monday, each MB Financial shareholder will get $54.20, comprising 1.45 shares of Fifth Third common stock and $5.54 in cash, a 24 percent premium to MB Financial's last close.
Shares of MB Financial were up 14 percent at $49.75 in early trade, while Fifth Third shares were down 7.2 percent at $31.12.
D.A. Davidson analyst Kevin Reevey said that Fifth Third was limited in their ability to expand in Ohio and that the acquisition of Chicago-based MB Financial was the most logical move for them, from a geographical standpoint, in order to expand their deposit franchise.
The merger will result in the combined entity having a total Chicago deposit market share of 6.5 percent, ranking it fourth in total deposits among the nearly 200 banks in the marketplace, Fifth Third said.
Fifth Third Bank, which operates 1,300 branches and 2,600 ATMs across 12 states, said the deal is expected to reduce it's regulatory common equity Tier 1 (CET1) ratio by about 45 basis points.
"Chicago has the highest number of middle-market firms in the U.S. for added prospectus... Chicago is simply a very important market for us," Fifth Third Chief Financial Officer Tayfun Tuzun said in a call with analysts.
Fifth Third expects pretax cost savings of $255 million annually, following the closing of deal expected by end of year. It also expects to add about 2 percent to operating earnings per share in 2019 and nearly 7 percent in 2020.
MB Financial Chief Executive Officer Mitch Feiger will be CEO and Chairman of Fifth Third Chicago, and other key members will also join the combined company.
Fifth Third said once the deal closes, two members of MB Financial's board were expected to join the Fifth Third Bancorp board.
Citi served as financial adviser to Fifth Third, while Sandler O'Neill + Partners advised MB Financial.
(Reporting by Nikhil Subba in Bengaluru; Editing by Shailesh Kuber)