By Adil Amlaiky, Anish Umasuthan, and Karen Zhuang (McGill University), Demi Akinjide, Ujwal Gurung, and Ishaan Patel (University of Bristol)
Photo: PiggyBank (Unsplash)
Overview of the deal
Acquirer: Bank of Montreal (BMO)
Target: Bank of the West (BNP Paribas’ US operation)
Total Transaction Size: $16.3 billion
Announcement date: December 20th, 2021
Expected Close Date: End of 2022
Acquirer advisor: Morgan Stanley and BMO Capital Markets
Target advisor: J.P. Morgan Securities, Goldman Sachs Bank Europe, and BNP Paribas Corporate Finance
Bank of Montreal (BMO) is acquiring BNP Paribas’ US Operation, Bank of the West, for a cash purchase price of $16.3 billion, using the combined entities’ balance sheet excess capital upon closing. By merging Bank of the West with its US subsidiary BMO Harris Bank, BMO will expand its US banking operation, notably in California, with an addition of 1.8 million customers and 514 branches of wealth and commercial offices. This deal, targeting California, which is economically larger than Canada and where 70% of Bank of the West’s deposits are, is set to increase BMO’s size. Being BMO’s largest acquisition in its history, the deal allows diversification of BMO’s revenue stream away from Canada.
The sale comes as no surprise following the trend of foreign banks leaving the US, with BBVA and HSBC having sold their US operations due to an increasingly competitive environment. With the proceeds from the sale, BNP Paribas aims to carry out stock repurchases, bolt-on deals, and investments. More importantly, the Paris bank aims to make a substantial distribution to shareholders through buyback to compensate for diluted EPS.
“With the strength of our performance and our integrated North American foundation, we have never been better positioned to take this next step in our growth strategy and to deliver for the new customers and colleagues we look forward to welcoming to BMO.” (Darryl White - CEO, Bank of Montreal)
Company Details (Acquirer - Bank of Montreal (BMO))
Bank of Montreal is an international investment bank and financial service provider founded in Montreal, Quebec, and headquartered in Toronto, Ontario. A part of the Big Five banks in Canada, BMO is the fourth largest bank in Canada in terms of assets.
Founded in 1817, headquartered in Toronto, Canada
CEO: Darryl White
Number of employees: 43,863 (2021)
Market Cap: $73.37 billion (as of 09/01/2022)
EV: $158.27 billion (as of 09/01/2022)
LTM Revenue: $21.92 billion
LTM EBITDA: $9.53 billion
LTM EV/Revenue: 7.22x
LTM EV/EBITDA: 16.6x
Company Details (Target - Bank of the West)
Bank of the West is a subsidiary of BNP Paribas, representing its Retail Banking, Wealth Management, Business Banking, and Commercial Banking US operations. The bank has more than 600 offices and branches in the Western and Midwest of the US.
Founded in 1874, headquartered in San Francisco, California
CEO: Nandita Bakhshi
Number of employees: 9,681 (2020)
Revenue: $2.75 billion (2020)
Net Income: $593 million (2020)
Projections and Assumptions
Short-term consequences
The sale could give BNP a war chest of $15 billion to fund expansion in Europe, where the bank has been ramping up its investment banking offering. The firm plans to target larger, more lucrative global clients.
From the vendor's perspective, the sale could boost the common equity Tier 1 ratio of France’s largest bank by 110 basis points to 14%, while shaving just 4% off its earnings. The deal should also lift BNP’s return on equity, which stood at just 9.2% during the third quarter. Given the loss in earnings from the transaction, BNP needs to spend €4 billion of proceeds on buybacks to offset the fall in earnings per share for shareholders. If the bank maintains a dividend payout of 60% of net income in 2022, then shares are yielding more than 7% on current earnings estimates. This deal should reward shareholders with price appreciation in the short term.
BMO also said that it was not planning any branch closures. Financially, the deal involves $1.3 billion of pre-tax merger and integration costs, but pre-tax cost savings will likely be up to $676 million, which would immediately add to the Bank of Montreal’s earnings per share.
Long-term Upsides
BMO’s acquisition of BNP Paribas’ U.S. subsidiary will naturally strengthen the bank’s expansion into the U.S in the long run. Considering that the majority of Bank of the West’s deposits are in California (70%), which has been resilient economically through the pandemic, the transaction will provide BMO with a strong foothold in the state’s market and will bring nearly 1.8 million customers and 514 branches in key U.S growth regions. BMO’s U.S assets are expected to increase by 33%, their deposits to grow by more than 60%, and their branch network to double in various high-growth regions.
Furthermore, the purchase diversifies BMO’s revenue stream away from Canada where the bank remains a key player in the financial services market. While the firm now has a competitive scaled entry into California, other market presences include Colorado, Nebraska, Iowa, Oregon, with entry into other states because of the possible future transactions. The bank expects to comprise around 44% of its revenues from the U.S, up from the 35% in total adjusted pre-provision pre-tax earnings last year. The expansion will allow BMO to reduce its exposure to the Canadian household market where the “borrowing capacity is somewhat limited” and focus more on the attractive U.S growth. The deal will increase BMO’s overall earnings by 10% by 2024 and will eliminate 35% of operating expenses without having to close any branches. Overall, the acquisition is the latest transaction BMO has made to expand into the U.S. Prior transactions include acquiring Harris Bank in 1984 and the takeover of Marshall and Ilsley Bank in 2011.
Risks and Uncertainties
The completion of the deal has been placed under question by financial analysts. The fundamental risk to consider is that the COVID-19 pandemic has shifted the economic landscape. As such, there are new hurdles in creating reliable assumptions, predictions, forecasts, and conclusions about any ongoing merger.
Additionally, the sale of BNP Paribas falls under a transitional period where U.S. regulations and prerequisites have tightened for incoming mergers. Regardless, BMO has insisted that the transaction meets all the approval requirements. A more pressing concern could be that the sedated approval process by U.S. regulators will provide an opportunity for competitors to launch a bid for BNP Paribas. The Bank of Montreal is one potential candidate to engage in a bidding war.
In a note on Dec. 20, Barclays analyst John Aiken said he can "see the strategic benefits from the acquisition, including further diversification of [BMO's] loan book and expanding its geographic footprint."
However, Aiken said, "The market's approval of the deal will hinge on accepting a 35% reduction in [Bank of the West's] cost base, despite not closing any branches. Further, BMO's relative capital advantage has now effectively disappeared overnight."