For most of 2023, Canadian investors have speculated whether Toronto-Dominion Bank (US:TD, CA:TD) would follow through with its $13.4 billion takeover of Tennessee-based First Horizon Corp. (US:FHN).

At last week’s annual general meeting, CEO Bharat Masrani reiterated “the benefits of the merger,” stressing those are what’s driving “extension discussions with First Horizon,” Reuters reported.

While there are some attractive reasons for TD to acquire First Horizon, many investors are betting that the company has backed itself into a corner it can’t escape.

TD’s doubling down on its commitment to complete the First Horizon transaction has significant implications for the future of Canada’s second-biggest lender and America’s eighth-largest bank.

More Discount 

It’s been 14 months since TD first announced that it was acquiring First Horizon. The closing deadline was extended by three months to May 27. The two parties are in discussions for a second extension to the deadline, to Aug. 27, and a possibly lower price paid per First Horizon share than the original $25 offered.

On the first issue, it seems unlikely that the two parties wouldn’t agree to a second extension because TD is unlikely to terminate the agreement — under certain circumstances, First Horizon would receive a $435.5 million termination fee — so they would likely end up in a lengthy court battle over who owes whom from a failed merger.

On April 18, CIBC Capital Markets analyst Paul Holden upgraded TD stock to ‘outperform’ from ‘neutral’. In a note to clients, Holden discussed his thoughts on an extension and the ultimate price TD would pay for First Horizon.

“We expect TD and FHN will agree to extend the offer and believe that an extension of six months or longer is possible given regulatory uncertainty. However, as previously discussed, there are multiple reasons to justify a lower offer price, and we think something around $22.50 per FHN share is a reasonable expectation,” Yahoo Finance reported Holden’s comments.

Yet the analyst was candid about any discount. “Extending the offer at the original price of $25 would be disappointing for TD shareholders. A longer closing period and a lower price would help address capital concerns for TD.”

Holden suggests shareholders would be disappointed if $25 remains on the table. However, $22.50 is only a 10% discount. First Horizon shares currently trade at a 26% discount to the original offer.

Shorts Circling

When Fintel reported on the ongoing merger negotiations between TD and First Horizon on April 7, TD had a short position of $3.7 billion.

According to Reuters data, that’s increased to $6.1 billion, 65% higher than at the beginning of April.

“I think that short interest was elevated by arbitrage investors betting on the (First Horizon) deal … suggesting that the market believes that the deal is at risk of closing,” James Shanahan, an analyst at Edward Jones, told Reuters.

If that’s the case, either the shorts feel that TD will not get much of a discount for First Horizon, or the deal in this current banking environment exposes TD to greater risk post-merger than before making its offer 14 months ago.

Either way, TD remains the most-shorted bank in the world. That’s not something Canadian banks are usually known for.

Bhasrani’s comments from the annual general meeting suggest that TD badly wants to become the sixth-largest bank in the U.S. That’s one reason for pushing the deal through. The other is that First Horizon operates in some of America’s most significant growth markets. TD has said these markets are growing 50% faster than the U.S. national average.

With weakness in its Canadian mortgage lending business due to a softer housing market, growth south of the border might be the best solution to maintain its position amongst the Big Five Canadian banks.

This article originally appeared on Fintel

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