TD Takes a $225 Million Bath on First Horizon as South-of-the-Border Deal Goes South

In what is the least surprising turn of events in North American banking, Toronto-Dominion Bank (CA:TD) and Tennessee-based First Horizon (US:FHN) have mutually agreed to call off their $13.4 billion transaction.

Canada’s second-largest bank went south of the border in February 2022 to pursue the regional lender. A year later, the two parties agreed to extend the transaction deadline from February 27 to May 27. Not a good sign.

In mid-March, a Fintel article wondered how TD could proceed with the First Horizon deal at the originally agreed-upon price.

Today, we have the answer. It can’t. And it will pay First Horizon $225 million for its trouble.

Exuding Confidence

TD CEO Bharat Masrani had publicly remained confident the deal would close up until the very day of the announcement. Questions will be asked about how and why it got to this point.

TD shareholders have just taken a substantial financial bath as part of management’s goal to become one of North America’s biggest banks. Unfortunately, the move has failed spectacularly.

As of 10 days ago, TD stock holders had lost 28% of their equity value from the original announcement. FHN stock holders were down less than 2%. This morning? Holders of the Canadian bank haven’t lost any more. As for the Tennessee target, the decline is more than 46%, at last look.

What comes next for Masrani and TD?

Will Heads Roll?

There is no question the failure of Silicon Valley Bank in March, followed by Signature Bank and this week’s Republic Bank takeover, played a significant role in the demise of TD’s acquisition of First Horizon. Smaller banks became unlovable overnight. First Horizon’s share price fell by 40% in less than a month, immediately rendering TD’s $25 a share offer pointless.

Masrani couldn’t have known that SVB, America’s 16th-largest bank, would implode in such spectacular fashion. However, once it became clear that the deal couldn’t go ahead at the agreed-upon price, TD should have cut its losses rather than dragging it out for another six weeks.

TD’s board and management team knew that First Horizon couldn’t budge from the $25 a share offer because its deposit base was crumbling by the day, rendering the FHN stock price worth far less than $15 where it traded in mid-March.

First Horizon management, meanwhile, had a duty to its shareholders to stand firm or extract a harsh penalty from TD. Today’s news reveals it got the only possible option it could have hoped for.

At TD’s April 20 annual meeting, Masrani continued to sing First Horizon’s praises, stating, “We see the benefits of the merger,” The Globe and Mail reported the CEO’s comments. “That’s why we are into an extension and a discussion with First Horizon.”

Now, two weeks later, TD doesn’t have a bank acquisition, but it does have a $225 million kill fee to be paid and thousands of hours of work on the deal down the drain.

Where Does TD Go From Here?

TD and First Horizon’s press release stated that the two parties called off the merger agreement because TD could not determine when or if the deal would be approved. However, they noted that the reasons were unrelated to First Horizon itself.

“This decision provides our colleagues and shareholders with clarity. Though disappointed with the outcome, we move forward with a strong, growing franchise in the United States, servicing more than 10 million customers across our footprint,” Masrani stated.

Unfortunately, recent reporting shows that Canadian banks, especially TD, are losing deposits in the U.S. as Americans move money to even larger banks such as JPMorgan Chase & Co. (US:JPM).

According to data obtained by Postmedia from National Bank analyst Gabriel Dechaine, TD is reported to have seen its U.S. deposits fall by 5% in the latest quarter compared to the previous quarter.

It’s not business as usual for TD south of the border. However, while TD’s press release implies all is well, it could lose deposits in the coming months.

Lasting Repercussions

The Globe and Mail reported that the mutual termination of the deal could have lasting repercussions for TD.

“Barclays Capital Canada Inc. analyst John Aiken said in a note to clients that ‘we are surprised that the parties could not come to an agreed upon lower price and believe that there could be broader repercussions from walking away from the deal,” The Globe reported on May 4.

“But he also said that breaking off the deal preserves TD’s capital reserves at a time of economic uncertainty. “Given the precipitous drop in regional bank valuations since TD made its announcement to purchase First Horizon, the fact that it is not preceding at the original valuation is a positive,’ he said.”

It will be tough for Masrani to win the board’s support to make a U.S. acquisition in the near future. As a result, the status quo for TD’s U.S. business appears to remain in place at least for the remainder of 2023 and into 2024.

This was not TD’s finest hour.

This article originally appeared on Fintel

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