Sunday, October 20, 2002

5/3 poised to gobble up yet another bank partner?

CEO Schaefer has appetite for acquisitions

By Jeff McKinney
The Cincinnati Enquirer

As Turkey Day approaches, Fifth Third Bancorp's George A. Schaefer Jr. could be getting hungry for another deal.

It was two Thanksgivings ago when Mr. Schaefer took his biggest acquisition bite ever, deciding to gobble up Michigan's Old Kent Financial Corp. It was a $5.5 billion stock deal.

Since the Old Kent purchase, Mr. Schaefer has repeatedly intimated to the Enquirer that the Cincinnati-based Fifth Third could have an appetite for another partner. "Come back and talk to me two Thanksgivings from now about acquisitions,'' Mr. Schaefer said in November 2000.

And some Wall Street industry analysts think that Fifth Third, which doubled its size with the Old Kent deal and became a Midwestern banking powerhouse, is eager for another purchase.

"Now that they're a $75 billion (asset) bank, the smaller deals won't push the needle like they used to, say, five years ago when they were half that size,'' said Bradley Vander Ploeg, an analyst at Raymond James in Chicago. "That alone could cause them to do more deals."

The possibility of another deal was heightened by Fifth Third chief financial officer Neal Arnold in a July conference call with industry analysts. When asked about acquisitions now that the integration of Old Kent is completed, he replied, "It's not Thanksgiving yet, but the turkey is thawing.''

And in an interview with the Enquirer last week, Mr. Schaefer said Fifth Third does not have to do a deal to maintain its industry-leading growth rate in revenue and profitability. But the bank remains "opportunistic'' if a willing seller comes along, he said.

Mr. Schaefer said that if Fifth Third pursued a deal, it would be willing to look at financial entities with assets between $1 billion and $20 billion. He's looking mostly at picking up new customers in such areas as Chicago, Detroit, St. Louis, Nashville and Cleveland.

"We'd be willing to do a deal, but the price has to be right,'' he said.

Mr. Schaefer also was quick to say that Fifth Third does not necessarily have to buy another "big bird'' as it did with Old Kent, which put Fifth Third in five major new markets - including Chicago, Detroit and Grand Rapids, Mich.

He said the bank could grow internally by adding branches in those cities it added in the Old Kent deal. In fact, Mr. Schaefer said, the bank plans to open 60 new branches in the seven states where it operates - mainly in Chicago, Detroit and Cleveland - by late 2003.

"That becomes a very cheap way for us to expand (rather) than paying three times book for someone. ... We're going to more likely use that strategy than doing anything else right now.''

Several possibilities

Still, Mr. Schaefer, who has spearheaded 60 acquisitions of smaller banks and thrifts since becoming Fifth Third chief executive in 1990, is not ruling out deals to sustain growth.

Mr. Schaefer painted some scenarios that could prompt the bank to do make a deal. It could:

Buy another bank or thrift in the highly competitive, yet highly fragmented, Chicago banking market. The Windy City, where Mr. Schaefer has repeatedly said Fifth Third would like to boost its 3 percent deposit market share, would offer the bank the fastest growth of any major city where it operates with 16 million residents as potential customers.

Continue its long-term strategy of making smaller, more conservative acquisitions that substantially reduce the bank's risk and expense. For example, Fifth Third is expected to complete its $240 million purchase of First Franklin in Tennessee by next spring, a deal that would give it nine more branches and $775 million in Nashville. In turn, Fifth Third could use such a deal to build more branches in that state or as a foothold to do smaller deals in the Southeast region, where it's not a major player but would like to be.

Consider another "Old Kent-type'' acquisition, a bank with assets between $1 billion and $15 billion, which would allow it to enter cities such as St. Louis, Milwaukee, Pittsburgh or Minnesota where it does not have a major presence.

Pursue buying so-called "body parts" of another regional banking company willing to divest branches. For instance, Mr. Schaefer said Fifth Third would be interested in buying a network of branches from another bank in a major city that offers growth potential and more expansion.

Consider a non-banking entity in the financial-services industry to complement its fast-growing data-processing unit or investment services arm - two businesses that Mr. Schaefer said Fifth Third would be willing to expand by acquisition if need be. That could be the least likely purchase.

Doesn't need deal

Many Wall Street analysts agree with Mr. Schaefer, that Fifth Third does not have to do a deal - but it's certainly in a position where it could do one. Using aggressive sales and stringent cost controls to increase revenues faster than expenses, Fifth Third continues to post double-digit earnings growth. It is an industry leader in profitability and stock value, posting increased earnings for 28 consecutive years. Just last week, Fifth Third said third-quarter earnings rose 15 percent from a year ago to $416.7 million, a record.

Fred Cummings of McDonald Investments in Cleveland said he does not expect Fifth Third to pursue a takeover of a company with more than $6 billion in assets, saying a larger purchase goes against its culture of being a conservative acquirer.

"They don't want the integration risks that a larger deal could bring.''

Yet some analysts think that to maintain growth over the long term, Fifth Third might be prompted to act.

They say the fact that Fifth Third's stock trades at a higher multiple than most major U.S. banks makes it much easier and cheaper for the Cincinnati bank to make acquisitions. Fifth Third has a market value of about $37 billion. It also now trades at 20 times estimated share earnings for 2003, versus 12 times share earnings estimates for next year for the nation's top 50 largest banks, including Citicorp, Bank of America Corp., Bank One Corp and Wachovia Corp.

Analysts say that's particularly true now because the stock value of most other banks has dropped significantly during the past year, making them a lot less expensive to buy than before. Plus, it keeps those banks from making purchases of their own since their stock isn't worth as much as Fifth Third's.

Whether Fifth Third would go for a whole turkey or a drumstick, here are some potential targets, analysts say:

First Midwest Bancorp. A suburban Chicago bank with assets of about $6 billion, a market value of about $1.2 billion and 69 branches in the metro area, 46 of which are in Chicago. Analysts say this would be a plum for Fifth Third as it would expand the bank's Chicago presence and allow it to pick up a solid banking company at relatively cheap price in a stock deal.

National Commerce Financial Corp. The Memphis-based parent of National Commerce Bank has about $20 billion in assets, a market value of almost $5 billion and about 470 branches in Tennessee and other southern states. Analysts say that while the bank is about a fourth of Fifth Third's asset size, it might be a good target. It would give the bank a major Southeast presence, one of the nation's fastest-growing regions - one that's expanding faster than the Midwest market.

TCF Financial Corp.: The Minneapolis-based parent of TCF National Bank in Minnesota, Illinois, Wisconsin and Colorado also operates in Michigan as Great Lakes National Bank. With a market value of $3.1 billion, it has 375 branches. Analysts said such a deal would expand Fifth Third's Midwestern presence and include entry into Minnesota.

First Merit Corp. The Akron, Ohio-based parent of First Merit Bank has been financially troubled recently, largely with problem business loans. It has assets of $10.5 billion, 157 branches in 22 Ohio and western Pennsylvania counties and a market value of about $1.8 billion. Analysts said First Merit creates an opportunity for Fifth Third to turn around an under-performing company and expand its northeastern Ohio presence for a relatively cheap price.

Mr. Schaefer would not specifically comment on the analysts' list, but he said all could be potential targets. Of course, finding banks willing to sell at a fair price is another matter, he said.

"We're going to remain opportunistic,'' Mr. Schaefer said. "We know how to carve the turkey, we just don't want to buy a bad bird.''


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