Toronto-Dominion Bank's $13.67 billion acquisition of First Horizon Corp. could rise in price or fall apart completely if it hits delays, as part of an unusual structure developed amid a slowdown in large U.S. bank deal approvals.
Under a provision in the banks' agreement, the all-cash deal's $25.00 per share price will increase by 65 cents per share on an annualized basis, or 5.4 cents per month, if the date of closing stretches beyond Nov. 27 — a date nine months after the deal was announced. If the transaction does not close within a year of announcement, it will automatically terminate unless otherwise extended.
Deal advisers said the structure is very unusual, but likely to become more common as buyers and sellers try to account for regulatory purgatory in light of recent bank deal delays.
"There is a greater risk associated with deals taking longer," James Stevens, a partner at Troutman Pepper Hamilton Sanders LLP, said in an interview. "And when there's a greater risk, it's more likely that people are going to agree to things to address that risk."
Large bank deals have drawn increased attention from both regulators and U.S. President Joe Biden, who called for more competition in the U.S. economy in a July 2021 executive order. Biden's call for increased scrutiny, along with uncertainty about future Federal Reserve leadership in late 2021, led to a backlog of bank deal applications at the agency and multiple deal closing delays.
U.S. bank deals have taken a median of 140 days to close over the last twelve months, according to S&P Global Market Intelligence data, but several larger deals have faced delays and pended for more than a year as a result of increased regulatory scrutiny.
Unusual structure
U.S. bank merger agreements typically are structured with an end date at which both parties can agree to terminate the transaction if the deal has not yet closed, but TD's and First Horizon's deal will automatically terminate if it is still pending at Feb. 27, 2023.
"The parties have to agree to not terminate rather than agree to terminate it," Stevens said. "The way that this is drafted, where it automatically terminates, reflects that there was a lot of concern about this taking a long time and a real intentional, pre-negotiated exit if they get to that date and it's not approved."
Stevens believes the additional compensation clause may have been influenced by First Horizon's expectation that its earnings will rise over time, making the company more valuable to an acquirer in the future.
TD President and CEO Bharat Masrani was optimistic on the Feb. 28 deal call that the First Horizon transaction will close around the nine-month mark, but some industry experts were less bullish. There is a "fair chance" regulatory approval will stretch beyond nine months, making it "quite possible" that TD will pay the additional cash for regulatory delays, Janney Montgomery Scott analyst Christopher Marinac wrote in a March 1 note.
"The odds are they probably end up paying more because it's going to take longer," said John Gorman, partner at Luse Gorman PC, a law firm focused on financial institutions. "Just the size of the deal and the political environment we're in is going to prolong the process."
Delays impact negotiations
As of March 8, 10 deals involving U.S. bank targets were pending beyond the median of 140 days. M&T Bank Corp.'s announced $7.60 billion acquisition of People's United Financial Inc. is the longest pending U.S. bank deal, stretching more than 381 days since the agreement. The companies recently extended their merger agreement to June 1 from Feb. 21, days before receiving approval from the Federal Reserve. The companies now expect the merger to close in April.
TD's bid for First Horizon is the second-largest pending U.S. bank deal behind Bank of Montreal's pending $16.30 billion acquisition of Bank of the West.
In the future, banks are likely to be more thoughtful about their merger agreements' end dates, Stevens said.
"Earlier in 2021, it's not like people didn't focus on the outside date and what happened at the outside date," he said. "But the idea was you're picking a date that's way off in the future that you think is very unlikely to happen. What you're seeing now is that people are really focusing on what date do they put in there and what happens on that date."
Whether future deals incorporate clauses to compensate sellers for regulatory delays will be a matter for negotiation. Not all buyers will be keen on paying more, said Kirk Hovde, head of investment banking for Hovde Group LLC.
"Most buyers would likely just say, 'No, we're not going to offer that up. And if you don't want to take our deal, so be it,'" he said in an interview.
"You may see more of these things on the larger deals," he said. "Targets may say 'This is going to take a lot longer. And if it does, we shouldn't be held out to dry and our stockholders should be sort of compensated for it.'"