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U.S. Bancorp USB has entered into a definitive agreement to acquire MUFG Union Bank’s core retail banking operations from Mitsubishi UFJ Financial Group MUFG for a cash-and-stock transaction valued at $8 billion, in a bid to boost its presence on the West Coast. The deal’s closure, expected in the first-half of 2022, is subject to the satisfaction of customary closing conditions and regulatory approvals. No shareholder approvals are required from both companies.
In response to the announcement of the deal that will fortify its presence in California, Washington and Oregon, shares of U.S. Bancorp have rallied 2.6%.
The deal would aid U.S. Bancorp’s primary subsidiary, U.S. Bank, with assets worth about $664 billion and bolster its status as the fifth largest retail bank in the United States. It will also have the required scale to compete with the largest consumer banks in California.
At present, 80% of U.S. Bank transactions are being conducted digitally, a trend which is likely to continue, courtesy the Covid-19 pandemic. Thus, the combination will ease the maturing needs of customers of both MUFG Union Bank and U.S. Bank, by facilitating a larger access to digital banking tools and an expanded branch network.
To help create wealth while delimiting how it serves diverse communities and diverse employees, U.S. Bank invests heavily in its communities. The acquisition will, thus, refine U.S. Bank’s competence to also commit to, invest in, and serve low and moderate-income communities and minority-led institutions.
Notably, MUFG Union Bank entered into a consent order with the Office of the Comptroller of the Currency on Sep 20, over charges of non-compliance with the federal information-technology security rules. U.S. Bancorp said it "evaluated and incorporated these regulatory concerns into all aspects of the deal process, including due diligence, integration planning and valuation. The company believes it can successfully remediate the issues applicable to MUFG Union Bank in connection with the transaction, and that the order will not restrict U.S. Bancorp's ability to operate and grow its business as planned."
In addition, U.S. Bancorp has deferred share repurchases until the second half of 2022 and also any planned buybacks have been re-allocated to the acquisition.
Terms of the Deal
Per the terms of the agreement, the $8-billion deal includes $5.5 billion in cash and 44 million shares of U.S. Bancorp. This will lead to Mitsubishi UFG getting a 2.9% stake in U.S. Bancorp. Apart from the deal value, the Japanese parent will get dividends or share repurchases worth $9.6 billion at MUFG Union Bank, bringing the total value of the transaction to $17.6 billion.
The transaction, nonetheless, does not include the purchase of MUFG Union Bank’s Global Corporate & Investment Bank, certain middle and back-office functions, and other assets.
With this move, U.S. Bank will bring in more than one million consumer customers and about 190,000 small business customers on the West Coast. Apart from this, based on MUFG Union Bank’s Jun 30, 2021 balance sheet, U.S. Bank will gain loans worth $58 billion and deposits worth $90 billion. The combination will strengthen U.S. Bank’s deposit status in California from 10th to the fifth position, with deposits per branch surging 60%.
Following the deal’s conclusion, U.S. Bank will retain all of MUFG Union Bank’s front-line branch employees.
Assuming a 75% synergy phase-in and 8% accretive to earnings when fully integrated, the deal is expected to be 6% accretive to 2023 GAAP earnings per share for U.S. Bancorp. The deal is estimated to be dilutive to the 2022 earnings per share (including PAA and with foregone share repurchases) in low single-digit percentage, while over the medium term, it is projected to be accretive in the low single-digit percentage.
The transaction has an estimated internal rate of return of more than 20%. Based on the expected capital to be delivered at close, the purchase price is estimated at 1.3X of MUFG Union Bank’s tangible book value.
U.S. Bancorp expects to achieve pre-tax cost synergies (40% of estimated non-interest expenses) of nearly $900 million via real estate consolidation, technology and systems conversion, and other back-office adequacies. Of these, 25% will be realized next year, 75% in 2023 and 100%, thereafter. Revenue synergies have been identified but not modeled.
Further, U.S. Bancorp expects to incur $1.2 billion in merger charges, of which 50% will be realized at closing and 50% in the second half of 2022.
U.S. Bancorp’s acquisitions over the past years have opened up new markets to the bank and fortified its existing footprint. In August, the company’s subsidiary inked an agreement to acquire Bento Technologies, a FinTech company that provides payment and expense management services to small and mid-size businesses. Its inorganic growth efforts, combined with the ongoing investments in innovative product enhancements, services and people, have strengthened its balance sheet and fee-based businesses besides increasing the market share.
Over the past six months, shares of the company have gained 6.6%, outperforming 4.8% growth recorded by the industry.
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Currently, U.S. Bancorp carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Other Banks Undertaking Similar Moves
Acquisitions have been on the rise in the banking sector, of late. In the current scenario, banks are moving toward consolidation to dodge the heightened costs of regulatory compliance and increased investments in technology in a bid to remain competitive. The prevalent low interest-rate environment and other economic challenges following the pandemic have taken a toll on banks’ profitability.
Earlier this month, State Street Corporation STT inked a deal to acquire Brown Brothers Harriman & Co.’s Investor Services business in a bid to ramp up and expand its core custodian business of servicing investment firms. State Street will shell out $3.5 billion in cash for this buyout.
Last month, Seacoast Banking Corporation of Florida SBCF, the holding company for Seacoast National Bank, announced two separate merger agreements. It agreed to acquire Sabal Palm Bancorp, Inc., the parent company of Sabal Palm Bank based in Sarasota, FL, and Business Bank of Florida, Corp., the parent company of Florida Business Bank based in Melbourne, FL. Both deals are expected to close in the first quarter of 2022.
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