Fifth Third (FITB) Closes Merger Deal With MB Financial

Fifth Third Bancorp (NASDAQ:FITB) has completed the acquisition of MB Financial, Inc. MBFI. Fifth Third received Federal Reserve’s approval for the same earlier in March. However, conversion of primary systems and client will take place in early May 2019.

Notably, business with existing clients of both companies will be carried out in the existing way till the conversion is concluded. Moreover, customers of MB Financial will be updated on pending branch and account conversions along with the timing of branch consolidations in Chicago in April 2019.

The combined entity will be the fourth largest bank in Chicago, in terms of deposits, with a 6.5% market share. The merged entity will stand second in estimated retail deposits and acquire 20% share of middle-market relationships in Chicago.

Terms of the Deal

The deal was entered into in May 2018 for a total value of $4.7 billion. In September 2018, MB Financial’s common shareholders gave their nod for the agreement. Notably, MB Financial’s preferred shareholders’ votes did not account for two-thirds of the total votes casted in favor of the merger. As a result, the company was not merged into Fifth Third’s existing subsidiary and instead will become an independent subsidiary.

Per the deal, each common shareholder of MB Financial received $54.20 of total value, based on the closing price of Fifth Third as on May 18. Notably, the total value indicates a premium of about 24% to share price of MB Financial as of May 18.

The consideration included stock equivalent to 1.45 of per Fifth Third share and $5.54 in cash for every MB Financial share held. The deal was agreed upon 90% stock and 10% cash.

Notably, converted common shareholders of MB Financial will not get the previously announced dividend from MB Financial to be paid on Apr 8, 2019. However, former common stockholders of MB Financial with common shares of Fifth Third in the merger are eligible for the latter’s previously announced dividend of 22 cents to be paid on Apr 15, 2019 as of record on Mar 29.

MB Financial, with about $20 billion in assets, serves middle-market customers as a leader with its strong deposit franchise, customer-centric corporate culture and commercial expertise. On completion, MB Financial’s strengths and Fifth Third’s huge corporate lending, capital markets, wealth management and the payments business will benefit customers with the complementary capabilities of both banks.

Deal Benefits for Fifth Third

The merged entity is expected to record an internal rate of return of about 18.5% and be accretive to Fifth Third’s operating EPS in the first year. Moreover, accretion of about 7% is projected in the second year on realization of full cost savings. Per Carmichael, this merger is expected to speed up the achievement of NorthStar financial targets.

Furthermore, the deal will reduce Fifth Third’s regulatory common equity Tier 1 (CET1) ratio by nearly 45 basis points. The pro forma tangible common equity to tangible assets (TCE) ratio of the combined entity is estimated to be 8.2%.

Bottom Line

We believe the latest acquisition will support Fifth Third’s future prospects in commercial banking. Post conversion, the bank will be able to cater to smaller commercial clients along with existing large corporate clients in a highly competitive Chicago market.

The company’s repositioning and restructuring efforts, which are underway, help it reallocate the capital into core markets. Additionally, its focus on cost control and efforts to boost long-term profitability are anticipated to augur well.

Fifth Third has gained around 4.6% over the past three months compared with 8.1% growth of the industry.

Currently, Fifth Third carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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