CIT, the commercial finance company that became a bank following
the crisis, announced
the $3.4B acquisition of One West this week. It is the largest bank deal this
year. It also propels CIT over the $50B strategically important financial
institution (SIFI) barrier. Thus, CIT will be subject to additional regulatory
requirements. Apparently CIT believes the strategic and financial benefits of
the deal more than compensate for the incremental burden. Another benefit from
becoming SIFI (AKA too-big-to-fail) is the implicit government guaranty which
could reduce funding costs.
The market response, along with the simultaneously announced
$500mm stock repurchase and substantial beat of the expected 2Q14 performance,
was a very positive 14% increase. The deal is a joint cash ($2B) and stock
($1.4B) transaction. The One West shareholders will have a 15% interest in the
new CIT post close. CIT’s Ba3/BB- ratings are expected to remain unchanged.
Both CIT and One West (formerly IndyMac) failed during the
financial crisis. CIT reorganized in bankruptcy. It was a non bank before the
crisis (banks cannot file for bankruptcy). IndyMac failed and was taken over by
the FDIC and sold to a group of private investors including among others
Michael Dell, John Paulson, George Soros, and Chris Flowers. The FDIC subsidized
the deal through a loss share agreement agreeing to cover most of IndyMac’s loan
losses. The continuation of the FDIC agreement is a condition of the deal.
This looks like a brilliant deal for the following reasons:
1)
Government subsidies: they get the FDIC and
implicit SIFI subsidies. Although hard to quantify they are very real. This may
encourage others not to fear the SIFI designation.
2)
Taxes: they get to accelerate utilization of
CIT’s substantial NOLs.
3)
Pricing: the trailing P/E is 14X, the P/TBV 1.4X
and a deposit premium of 6%. These are lean multiples. I cannot figure out why
they got it so cheap except maybe for the historical baggage associated with
IndyMac/One West. Another reason might be they are going early in cycle.
4)
Strategic Fit: similar to PACW’s successful 2.3B
2013 Capital Source acquisition-combining a deposit rich bank with a wholesale
funded finance company. The deal lowers CIT’s funding costs and funding risk.
DISCLOSURE: I am a PACW shareholder.
5)
Funding: the 60-40 cash stock split maintains
financial flexibility and preserves ratings. The issue of whether CIT’s stock
is undervalued remains open. The share repurchase helps moderate possible
undervaluation concerns.
6)
Earnings Accretion: the combination of low
price, stock repurchases and large funding costs savings promise significant
2016 15% EPS accretion. Academics frown on EPS as an accounting measure
unrelated to value. For me, EPS accretion is a second order pricing indicator.
It keeps management from over paying.
7)
Integration: the size seems manageable and the
retention of senior One West officers should aid the integration. Also, the 15%
ownership stake in CIT by One West shareholders helps cushion the downside if
something goes wrong.
8)
Sale Process: negotiated versus auction of a
private versus public firm moderates price competition.
An excellent combination of strategic and financial benefits
makes this a good deal and an example of the whole deal concept at work. Kudos
to the CIT team.
J
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