June 27 (Bloomberg) -- People's United Financial Inc., Connecticut's third-biggest bank by deposits, agreed to buy Chittenden Corp., Vermont's largest bank, in a stock and cash transaction valued at $1.9 billion to expand in New England.

Chittenden shareholders will have the option to receive cash or shares of People's United valued at $20.35 plus 0.8775 of the shares' five-day average closing price before the deal is completed, People's United said. The deal values shares of Burlington-based Chittenden at $37.00 each, 31 percent more than yesterday's closing price, People's United said.

Chief Executive Officer John Klein, who will head the combined company, said the acquisition is part of a plan by People's United to expand outside of Connecticut, where most of its branches are located. People's United, the Bridgeport-based holding company for People's United Bank, will add 133 Chittenden branches in Vermont, New Hampshire, Massachusetts and Maine to its current 160-branch network.

The transaction combines ``two high-performing banks with similar balance sheets, management styles and cultures'' and offers a rate of return that exceeds People's cost of capital, Klein said in the statement.

Shares of Chittenden rose $6.91, or 24 percent, to $35.15 at 4:16 p.m. in New York Stock Exchange composite trading. Shares of People's United fell 54 cents, or 2.9 percent, to $18.17 in trading on the Nasdaq Stock Market.

Price Target

Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners LP in New York, today reiterated a `buy' recommendation on shares of People's United, raising his 2008 earnings per share estimate by 12 cents to $1.06. Fitzgibbon, who also maintained his 12-month price target on the stock at $23, said the company may buy back shares and pursue other acquisitions.

About 55 percent of the $1.9 billion purchase price is in cash and 45 percent is in People's United stock, the statement said. The companies expect to complete the deal in the first quarter of next year.

Chittenden will get two board seats and its CEO Paul Perrault will stay on as part of the management team, the companies said in the statement. The combined company will have assets of about $22 billion.

``Nothing will change as far as the look of the bank. Chittenden will be Chittenden and customers will be dealing with the same employees,'' Chittenden spokeswoman Kathy Schirling said.

Some back-office positions may be eliminated as part of the acquisition, People's United spokesman Brent DiGiorgio said, without offering a specific number.

`Very Full'

People's United has $11.6 billion in assets and $10 billion in deposits, according to regulatory filings.

Chittenden has $6.6 billion in assets and $5.5 billion in deposits. On June 4, the bank said it plans to buy Wolfeboro, New Hampshire-based Community Bank & Trust Co. for $124.1 million.

People's United paid a ``very full'' price for Chittenden, Fitzgibbon said.

``Although we have always viewed Chittenden as a company with excellent balance sheet fundamentals and pristine credit quality, we have also always thought that they would run out of steam at some point given the slow growth nature of most of the markets in which they operate and their relatively large market shares,'' he wrote.

Morgan Stanley advised People's United on the purchase. Lehman Brothers Holdings Inc. and JPMorgan Securities Inc. advised Chittenden.

To contact the reporter on this story: Sandra Hernandez in New York shernandez4@bloomberg.net.

Last Updated: June 27, 2007 19:48 EDT