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Thain CIT Redux Makes Bankrupt Lender a Target: Real M&A

CIT CEO John Thain
John Thain, former chief executive officer of Merrill Lynch & Co. and chief exectuive officer of CIT Group Inc., has led a turnaround at CIT under which the lender refinanced or eliminated almost $31 billion in debt, reducing funding costs. Photographer: Jonathan Fickies/Bloomberg

John Thain, who sold Merrill Lynch & Co. for a premium at the height of the financial crisis, has transformed the once-bankrupt lender CIT Group Inc. into an enticing takeover target for some of the largest banks.

Toronto-Dominion Bank and Wells Fargo & Co., both flush with deposits and boasting high credit ratings, could be drawn to the commercial lender as a way to make more money by providing financing to non-Standard & Poor’s 500 Index companies, said Ely & Co. CIT, which has a market value of $8.7 billion, would give a buyer more corporate customers at a time of growth in commercial and industrial lending, according to data compiled by Bloomberg.

While still hobbled by a junk rating and a share price that’s trailed other financial stocks during the last two years, CIT earns more on its loans than 99 percent of U.S. banks and is projected by analysts to post its biggest profit this year since emerging from bankruptcy in 2009, the data show. The New York-based company now trades for just 1.1 times its tangible asset value, and Compass Point Research & Trading LLC said CIT could fetch $55 a share in a sale, 27 percent more than yesterday.

“It makes sense strategically and the math works,” Mike Turner, a Washington-based analyst at Compass Point, said in a telephone interview. “It’s a very, very attractive target.”

Curt Ritter, a spokesman for CIT, said the company doesn’t comment on market speculation, when asked whether Thain is considering selling CIT or if he’s been approached by acquirers. The company also declined to make Thain available for an interview.

In September, Thain, 57, said on CNBC that he’s “absolutely not” seeking a buyer.

‘Mr. Fix-It’

When Thain was named chief executive officer of CIT in February 2010, the firm had just emerged from bankruptcy and he was reeling from a high-profile exit from Merrill Lynch. In the crisis that brought down Lehman Brothers Holdings Inc. in September 2008, Thain had succeeded in persuading Bank of America Corp. to pay $29 a share for Merrill Lynch, a 70 percent premium to its stock price.

Merrill Lynch’s losses accelerated after the sale, and Thain was fired three weeks after the deal closed. Criticized for the losses, bonus payments and a $1.2 million office redecoration, Thain’s record of success, including previously running NYSE Euronext after spending more than 20 years at Goldman Sachs Group Inc., was tarnished.

“We view Thain’s tenure at CIT not only as another opportunity for him to demonstrate his ability to turn around an enterprise, but also an opportunity for him to rehabilitate his reputation,” Mark Palmer, a New York-based analyst at BTIG LLC, said in a phone interview. “Prior to his experience at Merrill Lynch, he had developed a reputation as a Mr. Fix-It on Wall Street. His experience at CIT has helped him to regain that moniker.”

CIT Turnaround

At CIT, Thain has led a turnaround under which the lender refinanced or eliminated almost $31 billion in debt, reducing funding costs. Analysts estimate the company -- which lends money to a range of businesses in industries including manufacturing, retailing and transportation -- will record $797 million in net income this year, the most since before the financial crisis, according to data compiled by Bloomberg.

CIT has been a rumored takeover target since emerging from bankruptcy, said Jeff Davis, managing director of the financial institutions group of Mercer Capital, an advisory firm in Memphis, Tennessee.

Its appeal for larger banks lies in its portfolio of high-yielding commercial loans, Davis said.

“Banks are making a huge push into leveraged finance,” he said in a phone interview. “CIT has a lot of industry expertise.”

Good Assets

CIT’s average $41.6 billion in loans, leases and other assets that pay interest had an average yield of 6.98 percent in 2012, according to its year-end filing. That tops 99 percent of U.S. lenders that have market values exceeding $1 billion, data compiled by Bloomberg show. The average yield on earning assets at banks with more than $10 billion in assets was 3.82 percent last year, according to the Federal Deposit Insurance Corp.

Lenders with “good assets, they have something that is really desirable at the moment,” Ralph F. MacDonald, a partner in Atlanta with law firm Jones Day that advises on bank mergers, said in a phone interview. “Good assets, earning assets, are hard to come by.”

A bank with higher debt ratings and lower funding costs could buy CIT and boost the profitability of its commercial-lending business, BTIG’s Palmer said. CIT’s debt is rated three levels below investment grade at Ba3 by Moody’s Investors Service and BB- by Standard & Poor’s.

The list of companies capable of acquiring CIT isn’t long, Bert Ely, an independent bank analyst with Ely & Co. in Alexandria, Virginia, said in a phone interview.

‘Big Buyer’

“It has to be a big buyer,” with a high credit rating and large number of deposits, he said, citing Toronto-Dominion, Wells Fargo, U.S. Bancorp and Bank of Montreal. Wells Fargo, the biggest U.S. home lender, had more than $1 trillion of customer deposits at the end of December, the third-most among North American banks larger than $1 billion, data compiled by Bloomberg show.

Rated AA- by S&P, Toronto-Dominion, Canada’s second-largest bank by market value, is tied with Royal Bank of Canada for the highest credit standing among North American lenders, the data show. Wells Fargo, U.S. Bancorp and Bank of Montreal rank one level lower at A+.

Representatives at Toronto-Dominion and Bank of Montreal, both based in Toronto, San Francisco-based Wells Fargo and Minneapolis-based U.S. Bancorp declined to comment on whether they want to buy CIT.

Takeover Hurdles

While CIT might attract interest from banks, there are potential hurdles to a takeover, Mercer Capital’s Davis said. For one, regulators are wary of letting large banks get any bigger, he said.

Refinancing CIT’s debt as part of any takeover also could be costly, Davis said. Even after it reduced its borrowings, CIT’s $22 billion in long-term debt is more than twice its market value, according to data compiled by Bloomberg.

Still, buyers willing to strike now and risk possible regulatory scrutiny can get CIT as it trades for 1.1 times its tangible book value, a measure of how much shareholders would receive if the firms’ assets were sold and liabilities paid off. That multiple is a 33 percent discount to the industry median, data compiled by Bloomberg show.

With CIT shares up 12 percent this year, BTIG’s Palmer and Compass Point’s Turner said a takeover bid in the mid-$50 range would be fair. At $55 a share, an acquirer would be paying a 27 percent premium to CIT’s closing price yesterday of $43.34.

Today, CIT shares fell 0.2 percent to $43.27.

“The main driver at this point, in our view, is the price of the stock,” Palmer said. “It has now appreciated to the point that the current price plus a premium could translate into an acceptable bid for CIT’s management and board. And so it’s more likely that a deal could get done here.”

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