Monday, November 30, 2015

Keep It Simple Stupid: The New York Community Bank Astoria Financial Acquisition


New York Community Bank (NYCM) announced on October 29 the $2B acquisition of Astoria Financial (AF). The market reaction was brutal with NYCB dropping 8% (around $500 Mln) and AF losing 6%.  Perhaps, the AF drops reflects the depreciating value of the NYCB stock it is receiving. It is unusual for both the buyer and seller to drop. It is an in-market deal which should lead to cost saves. The price is full, but on its face does not seem excessive at 15% premium (over stock which may have run up in anticipation of a bid), 1.6X tangible book (1.2X book) and 30X AF earnings (high, but may reflect AF weak earnings?).

So what happened? Well it seems plenty happened beneath the surface including:

1)     Regulatory: the acquisition pushes NYCB past the $50B regulatory threshold. This means it will be subject to more intense regulation. Some estimate the incremental costs at $10 Mln+ p.a.  for items like compliance. Not necessarily bad if part of a higher value strategy. Nonetheless, it needs to be explained to investors so they can evaluate.
2)     Charge: NYCB is changing its capital structure by repaying existing debt. This triggers a $615 Mln charge represents 4X estimated first year cost savings and 30% of the purchase price. The cost plus premium starts to make this look like an expensive deal. The reduced debt lowers the interest tax shield and further lowers NYCB’s value. May be a preemptive regulatory action to ensure the deal’s approval?
3)     Equity Issuance: NYCB is diluting existing shareholders by a) issuing $600 Mln+ in new equity to cover the charge listed above and b) equity consideration for 80% of the purchase price. This is a sizeable surprise.
4)     Dividend Cut: NYCB is cutting its dividend by 35%. NYCB had been a high dividend yielding stock and attracted a dividend seeking clientele. To be fair this may be due to regulatory concerns to ensure the deal’s approval.

 This deal is a net negative and a real turkey (sorry for the pun given the season). The deal may be strategic, but the price and the financial policy changes make it a loser. When acquiring it is best to keep things simple and to explain clearly your actions to your shareholders.


J

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