Oct. 2 (Bloomberg) -- Toronto-Dominion Bank, in the biggest foreign takeover by a Canadian lender, agreed to pay $8.5 billion for Commerce Bancorp Inc., the New Jersey company that ousted founder Vernon Hill three months ago.

Shareholders of Commerce, the state's largest bank, will get about $42.37 a share in cash and stock, or 6.6 percent more than yesterday's closing price, Toronto-Dominion said in a statement today. Toronto-Dominion shares fell the most in five years after the bank said the purchase will reduce profit in 2008 and 2009.

The 62 percent surge in the Canadian dollar since 2002 has increased Toronto-Dominion's market value to more than $52 billion, making foreign acquisitions cheaper for Canada's third- biggest bank. Commerce decided to sell after replacing Hill, the former chief executive officer, whose dealings with companies controlled by family members prompted a U.S. investigation.

Toronto-Dominion ``is striking while the iron is hot, with the Canadian dollar at parity,'' said Gavin Graham, who helps oversee about $5.3 billion as chief investment officer at Guardian Group of Funds in Toronto. ``It may be dilutive to earnings in the short term. But TD is making itself into a powerhouse in the northeastern United States.''

The Toronto-based bank already owns Portland, Maine-based TD Banknorth, and Hudson United Bancorp in Mahwah, New Jersey. With the purchase of Commerce, based in Cherry Hill, Toronto- Dominion will double its U.S. business, adding almost 460 outlets and $48 billion in assets across nine states.

Biggest Acquisitions

Toronto-Dominion's acquisition would be the third-largest foreign transaction for a Canadian company, trailing Manulife Financial Corp.'s purchase of John Hancock Financial Services in 2003 and the takeover of Reuters Group Plc by Thomson Corp. this year, according to data compiled by Bloomberg.

Canadian banks have announced or completed about $18 billion in acquisitions this year of banks in the U.S., Latin America and the Caribbean, taking advantage of the soaring dollar. The Canadian dollar reached equal value with the U.S. currency last month for the first time since 1976.

Royal Bank of Canada, the country's biggest bank, agreed today to buy RBTT Financial Holdings Ltd. in Trinidad and Tobago for $2.2 billion. Bank of Nova Scotia, the second-biggest bank, agreed in August to buy a lender in Chile for about $1 billion.

Toronto-Dominion declined $4.29, or 5.6 percent, to $72.65 in New York Stock Exchange trading, the biggest decline since July 19, 2002. Commerce fell 14 cents to $39.47.

The Commerce purchase will be made with 75 percent stock and 25 percent cash. The Canadian company offered 0.4142 share and $10.50 in cash for each Commerce share. That's $42.37 a share based on Toronto-Dominion's closing share price yesterday. The offer has a breakup fee of 3.9 percent, payable to Toronto- Dominion, if it isn't completed.

Canadian Expansions

The purchase adds to Banknorth's 600 branches and $40 billion in assets in New England and other northeastern states, making Toronto-Dominion the seventh-largest bank in North America by number of branches.

The offer equals about 2.8 times book value for Commerce, compared with the median price of 2.5 times book value for U.S. transactions of more than $6 billion since 2004, the bank said.

``A great franchise became available unexpectedly'' at the same time that the Canadian dollar was rising, said Toronto- Dominion Chief Executive Officer Edmund Clark. ``We have achieved critical mass in the United States.''

Commerce has branches in the New York and Philadelphia metropolitan areas, including about 25 in Manhattan, and around Washington and in Florida. The bank has about 15,000 employees and 2.4 million customers.

CEO Replaced

Hill, a former real estate developer who founded the bank in 1973, increased assets by more than 16-fold from 1995 through June. The red-trimmed branches were built to look alike, part of a branding idea that Hill said he got partly from his ownership of more than 40 Burger King restaurants.

Commerce said it would replace Hill in June when it agreed to settle a probe by the federal Office of the Comptroller of the Currency and the Federal Reserve Bank of Philadelphia.

The agencies were scrutinizing properties and business services provided by companies that Hill's family controlled. A company started by Hill was asked to search out potential branch locations for the bank, and a company owned by his wife decorated the branches. As part of the settlement with regulators, Commerce promised to end those arrangements and forbid new deals involving company insiders.

Toronto-Dominion's Clark told investors on the conference call that he's ``confident these issues will not impact growth.'' OCC spokesman Kevin Mukri declined to comment on the acquisition.

Culture Question

``The culture of the Commerce bank branches is going to be difficult to maintain if not impossible to maintain,'' RBC Capital Markets analyst Gerard Cassidy said. Keeping branches open seven days a week, one of the perks Commerce offered customers, may prove too costly to continue, he said.

A sale was inevitable once Hill was removed, Cassidy said.

``He was the life and the blood of that organization,'' Cassidy said. ``When he left, it was taking the heart out.''

The Canadian bank will take a pretax charge of $490 million after the purchase is complete for ``technology and human resources'' costs, Colleen Johnston, the chief financial officer, said on a conference call today. The costs aren't related to any securities owned by Commerce.

The bank expects to reduce costs by about $310 million with the merger, starting in 2009, she said. The current management at Commerce will remain, reporting to Bharat Masrani, CEO of TD Banknorth, the banks said. Commerce will record costs of about $150 million in the third quarter after it sells some of its fixed-income securities at a loss.

JPMorgan Chase & Co. and Keefe Bruyette & Woods advised Toronto-Dominion, with Simpson Thacher & Bartlett LLP as legal advisers. Goldman Sachs Group Inc. worked with Commerce, as did Sullivan & Cromwell LLP.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; David Scanlan in Toronto at dscanlan@bloomberg.net.

Last Updated: October 2, 2007 16:34 EDT