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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