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.

Sometimes, paying up for a deal is the right thing to do -- especially if you're richly valued yourself.

Arkansas lender Home BancShares Inc. said late Monday that it would buy Stonegate Bank for $780 million, taking its total assets to roughly $13.5 billion. The cash-and-stock deal values Fort Lauderdale, Florida-based Stonegate at roughly 2.4 times its tangible book value, making it the most expensive acquisition Home Bancshares has ever struck and a premium to recent regional bank deals, including Sterling Bancorp's purchase of Astoria Financial Corp.

Forging Ahead
Stonegate is the first target for which Home BancShares has been willing to pay more than two times its tangible book value
Source: Company presentation

The $3.8 billion lender's decision to splash out is validated by the fact that its stock is trading at a such a wide premium, making almost any deal in its sights accretive. And this transaction in particular will give Home BancShares a larger footprint in Florida, fulfilling a longtime goal. 

Flying the Flag in Florida
In the Florida market alone, Home BancShares-Stonegate will jump to third among lenders from fifth and eighth, respectively
Source: Company presentation

The quality of Stonegate's business also helps to justify the price, exemplified by a ratio of non-performing assets to total total assets of 0.39 percent. That's lower than even Home BancShares at 0.81 percent.

Also, the deal gives Home BancShares exposure to Cuba, where Stonegate has been building a business after securing a license from the U.S. Treasury Department's Office of Foreign Assets Control. There's decent potential for growth, especially because Stonegate is the first U.S bank with permission to issue MasterCard credit cards for use in Cuba, both to employees of large American companies conducting business there as well as regular consumers. It's early days in that initiative, so even if President Donald Trump were to wind back his predecessor's actions that have somewhat normalized relations between the two countries, the rationale for the merger will still stick.

Room to Improve
Stonegate's relatively strong profitability metrics should get even better under Home BancShares' ownership
Source: Bloomberg

Speaking of Trump, this deal brings to 11 the number of U.S. regional bank transactions that have been struck in the less than five months since his election. That's about the same as were announced in all of the first 10 months of 2016, according to data compiled by Bloomberg.

As I've written, lenders are taking advantage of the post-election rally in their shares to bulk up by using their own stock as currency for acquisitions. While some of those gains dissipated following the failure of Trump and the Republican-led Congress to pass health-care legislation, the stocks are still at a level that should allow this trend to continue. The next domino to fall? Keep an eye on FCB Financial Holdings Inc., which -- at roughly 2.2 times its tangible book value -- could be swallowed up soon. 

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

  1. The data refers to deals valued at $200 million or more. 

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