The Toronto-Dominion Bank’s (TSX:TD) $13.4 billion merger with First Horizon (NYSE:FHN) has officially ended. In a press release dated May 4, TD announced that it was unable to obtain the regulatory approvals necessary to push the deal forward. First Horizon shares fell 50% on Thursday when the news was announced. The shares recovered later in the day, though they were still down 37% at the time of this writing.
As a TD Bank shareholder, I consider the end of the First Horizon deal to be good news. TD Bank framed the development as a negative, brought on by regulators, but in reality the termination was a positive for TD Bank shareholders. The markets seemed to agree: TD Bank stock was up 0.15% as of this writing, when most bank stocks were severely in the red due to the First Republic and PacWest failures. In this article, I will explain why I consider the end of the First Horizon deal to be a major positive for TD Bank shareholders, and why I will continue holding my TD shares.
TD offered too much
The main reason why the end of the First Horizon deal is a positive for TD Bank shareholders is because TD offered too much for FHN. Even back in 2022, when the deal was announced, the price offered was arguably too much. TD was offering 15 times earnings for FHN, when bank stocks typically went for 10 times earnings. TD claimed that it would get the deal P/E ratio down to 9.8 by realizing $660 million worth of “synergies” (basically cost savings). The idea that TD could have helped FHN save money was a plausible one, as larger companies have more bargaining power than smaller ones do. However, TD didn’t provide much detail on how these synergies would be realized. I basically was skeptical of the whole claim. It seemed to me that TD was trying to make it look like it wasn’t offering too much money for First Horizon, when it actually was.
At any rate, once the regional bank collapse got underway, TD’s offer price for FHN became really questionable. Large U.S. banks fell to eight to nine times earnings, and regionals like FHN went to three or four. TD was offering a mighty hefty premium for FHN compared to that bank’s peer group.
Terminating the deal will not be expensive
Another reason why TD terminating the FHN deal is a positive, is because TD doesn’t have to pay out much money to do so. Terminating deals is usually a costly affair, because acquired companies want compensation for their shareholders. TD is only paying $200 million to terminate the FHN deal. For context, TD does about $15.2 billion a year in net income. On a per-share basis, TD is paying literal pennies to back out of its overpriced deal with FHN. A fantastic outcome for TD shareholders.
Foolish takeaway
As a TD shareholder, I am thrilled that the bank’s deal with FHN is over. The deal was a significant negative for TD. Not only was the original offer price too much, TD was paying extra fees for each day the deal was delayed. I couldn’t be happier with what has happened.
