Toronto-Dominion Bank is unsure when it will close its acquisition of First Horizon Corp., leaving the companies negotiating again just weeks after extending their merger agreement.
At the beginning of February, Toronto-Dominion Bank, or TD, and First Horizon agreed to extend the outside date of their merger agreement to May 27 from Feb. 27 for the deal that was originally announced over one year ago. But now, just three weeks after agreeing to the extension, the companies are not confident about that May 27 outside date.
First Horizon disclosed in a March 1 Form 10-K filing that TD does not expect to receive the necessary regulatory approvals in time to complete the pending deal by May 27. The companies have initiated discussions regarding another extension, but TD cannot provide First Horizon a projected closing date, the Form 10-K stated. TD executives reiterated that belief on the company's March 2 earnings call.
"We believe that we will not be able to close this transaction by that date," TD Group President and CEO Bharat Masrani said. "Regulatory approval is not within the bank's control."
The TD-First Horizon deal is the last deal left pending from a wave of large U.S. bank transactions announced between Jan. 1, 2020, and June 30, 2022. Among U.S. bank deals with an announced value of at least $2 billion during that time frame, most faced hurdles such as increased regulatory scrutiny, delays and prolonged closing timelines, but they all eventually received regulators' sign off. The median days elapsed between announcement and close for those transactions was 326 days.
TD and First Horizon's transaction has been pending for over 370 days, and the companies are unsure when it could close. Industry experts predict that the deal will eventually close, but the time passed has increased the risks associated with the deal and could force price renegotiations, they said.
Risks abound
Prolonged closing time frames bring increased risks such as employee and customer attrition. For TD and First Horizon, another risk of passing time is the potential for price renegotiations, according to equity analysts.
Following First Horizon's disclosure March 1 that TD is now unsure when the deal will close, the Memphis, Tenn.-based company's stock price plunged and closed down over 10% from its Feb. 28 closing price. As of March 7, First Horizon's stock price was $21.29, below the $25-per-share price for the all-cash deal.
Now, renegotiating the deal price "may not be completely off-the-table," Jefferies analysts wrote in a March 3 note.
TD's CEO did not shut down speculation that the purchase price could be renegotiated.
"We've just initiated the negotiations. And once the negotiations are finalized, we will be sure to give you further details," Masrani said when asked about the possibility of a price change on the company's earnings call.
In a March 3 note, Compass Point analyst Ed Groshans wrote that a price change could result from the companies' latest renegotiations. The analyst believes the companies could decide on an Aug. 27 deadline that could end up extending again to Nov. 27.
Though the deal is pending with no end in sight, analysts are mostly confident it will eventually close.
"We don't see imminent risk to this deal closing despite the delays," Wells Fargo analysts wrote in a March 1 note. "Larger deal delays have become the norm recently."
Still, the disclosure that the companies are unsure when the deal could close after just extending the merger agreement date to May 27 is "surprising," Barclays analysts wrote in a March 1 note.
"We cannot deny that it brings additional uncertainty in terms of the timing and ultimate completion of the acquisition of First Horizon by TD," Barclays said. Until a new extension is announced, "the likelihood of the deal not being completed has increased based on this disclosure."
If the deal were to fall apart, First Horizon would be faced with "remedial work to repair reputational damage" as it has already experienced pressure on employee and client retention, according to the Wells Fargo analysts.
TD's CFO, Kelvin Tran, said the company is "very committed" to the transaction and "working really hard to get the deal closing as soon as we can" when asked at an March 7 industry conference about what the company's plan B would be if the transaction fell apart.
What's the holdup?
A number of factors could be causing the regulatory holdup.
Chip MacDonald, managing director of MacDonald & Partners LLP, said TD's status as a global systemically important bank, or GSIB, "raises another level of scrutiny."
Regulators might also be zeroed in on the banks' resolution plans.
"There has also been some chatter that with deals where a foreign bank and domestic U.S. bank are involved, the regulators get a little more focused on the resolution plans of the combined entity, so that could be playing a role," Eric Compton, equities strategist covering U.S. and Canadian banking at Morningstar Research Services LLC, said in an email. "Tough to know the details, but regulators are certainly being more stringent these days when approving these deals."
Another factor regulators could be taking into account is TD's overdraft fee income — an area regulators have recently cracked down on.
In the fourth quarter of 2022, TD Bank NA reported $742.1 million in consumer deposit service charges, making it fourth on the list of banks with the most consumer deposit fee income. The line item made up 6.7% of the bank's operating revenue at Dec. 31, 2022, above the industry median of 1.4%.
"The regulators do seem to be quite focused on those specific fee items, so to the extent that they think TD is an outlier, perhaps there could be some back and forth about what the combined bank's practices would be," Compton said in an email.
The bank's overdraft fee income came under fire in an Aug. 23, 2022, letter from the Center for Responsible Lending, or CRL, and other consumer advocates to the Federal Reserve Bank of Philadelphia and the Office of the Comptroller of the Currency urging the regulators to reject the planned merger. The CRL rarely presses regulators to strike down specific bank deal proposals.
"TD Bank continues to rely on excessive overdraft fees to drive its profits," Mitria Spotser, the CRL's vice president and federal policy director, said in a February statement to S&P Global Market Intelligence. "The OCC and Federal Reserve should not move forward with approving TD Bank's proposed expansion without first requiring the bank to address this issue."
Factors that bode well
Though the companies do not feel confident in their ability to predict a closing timeframe right now, two recent events bode well for eventual approval coming down the pike, industry experts said.
In January, another deal involving a Canadian bank buyer — Bank of Montreal — secured regulatory approval and closed one month later in February after pending for 408 days.
"I think that the fact that BMO recently announced regulatory approval for the Bank of the West acquisition gives me more confidence that TD can close First Horizon with regulatory approval," Scott Chan, managing director of equity research about financials at Canaccord Genuity, said in an interview.
Similarly, TD's $50 billion community benefits agreement with National Community Reinvestment Coalition that was announced Feb. 15 could help to smooth the approval process. Though these type of agreements are not monitored or enforced by regulators, MacDonald anticipates that the OCC and Fed will review how the banks will implement this agreement, its cost and the impact on the banks.
Such agreements have become "commonplace" in the deal process, the Jefferies analysts wrote, as many other large deals have closed after reaching similar agreements.
Under the five-year plan, TD will open the greater of 25 new branches or 25% of all new branches in low- and moderate-income and/or majority-minority markets across the combined TD and First Horizon footprint. Part of the agreement also involves creating an "impact strategy" related to community development financial institutions and minority depository institutions, which is estimated to have a total impact of $1 billion, according to the release.
Community needs are an area of increased focus for bank regulators.
"The regulators will make sure that any acquirers and targets are not negatively impacting the community — in terms of jobs [and] in terms of branch locations potentially being closed," Mike Rizvanovic, research analyst at Keefe Bruyette & Woods, said in an interview. "So it seems like it's become an environment where there's more and more scrutiny with these larger deals, and I can't imagine that's going away."
