TD Bank (TSX:TD): Massive U.S. Deal Could Close Soon

The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is about to close a $13.4 billion U.S. deal, sources say.

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Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is in the process of closing one of its biggest deals ever. The deal will see it pay US$13.4 billion to buy First Horizon National (NYSE:FHN), a regional bank in the southeastern United States. The deal will increase TD’s presence in Tennessee and Florida, states whose populations are growing 50% faster than the U.S. average. It will also add $89 billion in assets to TD’s balance sheet.

Lately, there have been some concerns about whether TD’s First Horizon deal will actually close. U.S. senator Elizabeth Warren sounded the alarm about the deal, accusing TD of abusive practices like giving customers overdraft without their permission. She forwarded her concerns to the Office of the Comptroller of the Currency (OCC), but TD’s subsequent meeting with community groups went off without a hitch. In this article, I will explore several reasons for optimism that TD’s first horizon deal will, in fact, close.

Portfolio manager says First Horizon deal likely to close

One good sign we have indicating that the TD/FHN deal will close is the fact that a portfolio manager close to the matter thinks it will. Roy Behren, manager of the Merger Fund, said that the deal was likely to close. He elaborated by saying that FHN’s price (about US$23) was understating the odds of the deal closing. As a mergers & acquisitions fund manager, Behren is very familiar with the matters at play (e.g., regulatory approvals).

TD only needs approval from the Federal Reserve and the OCC to close the First Horizon deal. If those permissions are gained, then the deal will move ahead. That’s only two required permissions, so it really isn’t that much red tape in the grand scheme of things.

TD has the financing ready

Another good omen for the TD/FHN deal closing is the fact that TD has the financing ready to close the deal. TD Bank has $1.73 trillion in assets on its balance sheet. It also has a 15.2% common equity tier-one (CET1) ratio — that’s a ratio of high-quality assets to total capital that regulators require. Regulators only require an 8% total capital ratio and a 6% CET1 ratio, so TD has more than twice the tier-one capital (high-quality capital) it needs to meet regulatory requirements. Therefore, it has plenty of balance sheet assets ready to close the FHN deal.

Is this bullish for TD Bank?

Having looked at two reasons why the TD/FHN deal is likely to close, we need to ask whether the deal is, in fact, a positive for TD Bank. It’s here that the matter gets a little more controversial. When TD announced its intent to buy First Horizon bank, FHN had US$900 million in 12-month net income.

The deal valued the company at US$13.4 billion, so we’re looking at about a 15 price-to-earnings (P/E) ratio (price divided by earnings). That’s an extremely steep price tag for a bank, as today, U.S. bank stocks trade at around nine times earnings on average. Many people thought that TD offered too much for FHN, but the bank itself claims that the deal will empower First Horizon to save $610 million through cost synergies (i.e., cost savings that come from the deal). If that actually happens, then the P/E will shrink to 8.9, which is typical for a U.S. bank stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in The Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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