Banking, finance, and taxes

Is CIT Getting Enough Premium in the First Citizens Merger?

Jon C. Ogg

Published: October 16, 2020 12:01 pm

Friday’s reporting about CIT Group Inc. (NYSE: CIT) was supposed to be all about how the lender’s earnings were looking. After all, CIT’s shares had slid from $48 in February to under $20 right before the earnings report. Then came the surprise announcement that CIT was entering into a merger with First Citizens BancShares Inc. (NASDAQ: FCNCA).

This was touted as a merger of equals, with approval by both corporate boards of directors. It also is being touted as what would become the 19th largest U.S. bank by assets, with more than $100 billion combined. The reality is that First Citizens is larger even after the reactions in the shares, and it will own more of the post-merger bank.

CIT’s post-merger news market cap was about $2.4 billion, and First Citizens has a $3.7 billion market cap. Under the terms of the merger agreement, CIT stockholders will receive 0.0620 shares of First Citizens class A common stock for each share of CIT common stock they own. After the merger, First Citizens stockholders will own approximately 61% of the combined company, versus 39% owned by existing CIT holders.

Some CIT shareholders are likely to ask if this is enough of a merger premium. Another issue to consider is that many CIT shareholders may have never even known about First Citizens. Even after CIT’s big pop on the news, its stock also remains under the $26.44 consensus analyst target price from Refinitiv.

The merger was referred to as a “transformational partnership” that “will create greater scale to drive growth, improve profitability and enhance stockholder value.”

The reality is that this is taking First Citizens’ retail deposit franchise and its existing banking products and adding in CIT’s national footprint in commercial lending activities. First Citizens has more than 550 bank branches in major metro areas. In short, growth and diversification.

Friday’s release also talked up synergies with greater scale, driving growth, improving profitability and enhancing stockholder value. While it would be easy to see those synergies in a merger, the press release specified a targeted earnings per share accretion of 50% or more with fully phased in cost synergies. It further noted that it was targeting approximately 30% accretion in the tangible book value per share and roughly 10% in targeted pro forma combined noninterest expense savings.

While the announcement did not specify the details about shareholder returns, it did point out strong capital levels would facilitate additional growth and stockholder-enhancing capital management strategies. Those are buzzwords for dividends, buybacks and deleveraging.

First Citizens is based in Raleigh, North Carolina, and dates back to 1898. It also has branches in Arizona, California, Colorado, Florida, Georgia, Kansas, Maryland, Missouri, North Carolina, New Mexico, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia, Washington, Wisconsin and West Virginia. CIT dates back to 1908, but the New York-based lender also counts 60 banking branches throughout southern California.

Evaluating these banks on today’s terms might be more difficult because of the pandemic. Both stocks are still handily down from their highs, even after the gains on the merger announcement. CIT generated $2.34 billion in revenue and net income from operations of $529.4 million in 2019. First Citizens generated $1.72 billion in revenue and net income from operations of $457.3 million in 2019.

The merger is expected to close in the first half of 2021, subject closing conditions, regulatory approvals and shareholder approval for each company.

First Citizens BancShares rose 9.5% to $387.00 after the merger news, in a 52-week range of $276.08 to $542.12.

CIT Group stock was up about 25% at $24.70, and it has a $12.02 to $48.96 range over the past 52 weeks.

As for CIT’s $26.44 consensus target price, some of the analysts covering it have even higher target prices. BMO Capital Markets has a $29 target price, Citigroup has a $28 target price and Morgan Stanley has a $26 target price. First Citizens has no formal analyst price targets.

By calling it a merger of equals and having an all-stock transaction, the shareholders of each company should still get to see continued upside ahead, if the combined entity can deliver on those synergies and manage to get back to growth. Now they just have to go prove it.