Sep. 30–A buyer with deep pockets is paying premium prices for banks in the Philadelphia area — and driving up prices of other potential acquisition targets.
The buyer, Citizens Bank, had investors drooling last week over the 35-percent premium it agreed to pay Philadelphia’s Roxborough-Manayunk Bank.
So much for the good news. Now for the bad: Citizens, an arm of Royal Bank of Scotland, is paying prices that are also inflating the expectations of sellers, potentially scotching talks before they start.
Royal Bank of Scotland “shows a willingness to bid whatever it takes,” said Harry Terris, research manager at SNL Financial, a Charlottesville, Va., research firm, and publisher of the newsletter Bank Mergers and Acquisitions.
Bucking a national trend, Philadelphia area bank stocks sport a takeover premium. “M&A is driving up everyone’s stock price,” said Richard Weiss, an analyst for Janney Montgomery Scott, in Philadelphia.
Even so, investors should keep their expectations in check, analysts say. Trying to pick takeover targets is like tossing darts. What’s more, they expect bank stocks to cool as interest rates climb.
“You should never buy a stock just for takeout” in a merger or an acquisition, said Charles K. Hull, a director of investment banking at Boenning & Scattergood, the West Conshohocken brokerage firm.
Investors should do their homework on bank stocks to minimize risk, said Cassandra Toroian, director of equity strategies at Cohen Bros. & Co., a Philadelphia brokerage.
They should pick banks that are fundamentally sound — so even if there is no merger, they would still own a company with strong earnings and regular dividends, she said.
Cautious investors could reduce risk further by purchasing mutual funds that specialize in small-bank stocks. Two examples, FBR Small Cap Financial and Emerald Select Bank and Finance, have earned Morningstar’s top ranking of five stars.
Even so, Morningstar analysts warn that small banks can be cyclical, lagging when larger banks claim Wall Street’s attention, as they are now.
In a turnabout, the Dow Jones banks index trails the Dow Jones industrial average so far this year, with higher interest rates squeezing lending activity and investment portfolios. In the bear market, bank stocks ranked as rare winners.
In Philadelphia, many of the major banks are turning to acquisitions for growth. PNC Financial Services Group Inc. agreed to pay $638 million in August for United National Bancorp. and its 58 branches.
Just days later, FleetBoston Financial said it would pay $211 million for Progress Bank and its 17 offices in Pennsylvania and one in New Jersey, and Citizens Bank agreed last week to pay $136 million for Roxborough-Manayunk bank and its 11 branches.
Progress shares were trading for $16.96 when FleetBoston offered $28, for a 65 percent premium. Citizens’ offer of $26 bumped the market price of Roxborough-Manayunk’s parent by 35 percent.
Analysts credit growth-minded Citizens and its deep-pocketed British parent for the flurry of rich deals that are making the Philadelphia area a hot bed of acquisition activity.
But trying to pluck merger candidates from their ranks “is a dangerous game,” Weiss said.
Institutional investors aren’t deterred. Tontine Partners, a New York hedge fund specializing in small banks, had stakes in both Progress and Roxborough-Manayunk, according to disclosure filings as of June 30.
The fund owned about 140 bank stocks as of that date, including eight issues in this area. “It’s easier when you have a $1 billion to invest,” joked Hull, of Boenning & Scattergood.
TF Financial Corp., the Newtown parent of Third Federal, is a Tontine holding, as are Yardville National Bancorp; Hamilton, N.J.; and Willow Grove Bancorp., Maple Glen.
Tontine partner Jeffrey Gendell didn’t return a phone call for comment.
“I guess they figure we’ll make money for them, or they’ll make money on us,” said Dennis Stewart, a TF Financial senior vice president. “We’re a public company, so anyone can buy our stock in any amount.”
But investors never know what’s happening behind the scenes, if anything. Shares in Sovereign Bank shot up 18 percent to $19.68 this summer after the Philadelphia company starred in rumors as Royal Bank’s next target. No deal has occurred, and Sovereign shares closed yesterday at $18.40, up 45 cents for the day.
Hudson United Bank gained 13.5 percent to $40.39 in August thanks to takeover speculation. The stock closed yesterday at $35.31, or less than it fetched before the rumors began.
“Eventually it will happen,” said Evan Momios. The Standard & Poor’s Corp. equity analyst estimates that a Hudson acquisition would be priced at $42 to $47 a share. “No one can tell you exactly when,” he said.
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(c) 2003, The Philadelphia Inquirer. Distributed by Knight Ridder/Tribune Business News.
RBOS, PNC, UNBJ, FBF,
