Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Canadian Imperial Bank of Commerce has finally made its long-awaited U.S. acquisition.

Canada's fifth-largest bank agreed to buy Chicago-based PrivateBancorp for $3.8 billion, spending more than the previously guided C$2 billion ($1.54 billion) to C$4 billion price tag that CEO Victor Dodig had suggested he'd commit to a U.S. wealth-management and private-banking deal. 

His decision to go above and beyond has a simple rationale: There's more growth potential in the U.S., and it's a good to time to gain exposure with interest rates eventually set to rise. After the acquisition, CIBC's U.S. banking business will account for 10 or more of its net income. That number is expected to soar to 25 percent or more over time -- and lead to higher profits overall.

Rubbing Shoulders
Chicago's high net worth individuals have more assets than their peers in Canada. Its deposit growth between 2005 and 2015 was the third-fastest behind New York and Los Angeles.
Source: CIBC

CIBC is financing around 60 percent of the deal with stock, which should come as no surprise. Not only has the Canadian dollar weakened by 15 percent since Dodig stepped into the top job, but paying with a large chunk of stock allows the bank to maintain a key liquidity ratio known as Common Equity Tier 1, or CET 1, of more than 10 percent. That's safely above the regulatory minimum of 4.5 percent.

Its shares traded lower Wednesday, partly because minimal synergies mean the deal won't be accretive until 2019 (it'll actually dilute 2016 earnings). Still, investors should take comfort that the transaction, at a forward P/E multiple of around 18 and 2.2 times tangible book value, is cheaper than Royal Bank of Canada's $5.4 billion purchase of City National for $5.4 billion. That deal, which closed last November, valued the Los Angeles-based bank at roughly 21 times consensus earnings, or 2.6 times tangible book value. 

Take It To The Bank
PrivateBancorp shareholders are receiving roughly $47 a share from CIBC which is just below the stock's 2006 high and above analysts' 12-month price target of roughly $43
Source: Bloomberg

Now that CIBC has landed its target, the pressure shifts to rival Canadian banks like Toronto-Dominion Bank and Bank of Montreal to step up their dealmaking efforts. For context, the duo already have a greater exposure to the U.S. than RBC and CIBC and would benefit more from a rise in rates there (as seen in the below chart), but a cross-border purchase could help extend their lead.

Still Trailing
CIBC's PrivateBancorp deal gives it more exposure to rising U.S. rates, but it's still behind peers
Source: Canaccord Genuity estimates, based on bank guidance

As long as a prolonged recovery in the Canadian-centric mining and energy sectors remains out of sight, any further diversification away from The Great White North is welcome. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Adds upper end of takeover price range in the second paragraph.)

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net