United Financial could've sold for a lot more money, filing shows

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United Financial Bancorp and People’s United Financial talked for a long time before reaching a merger deal last month, and People’s United saved a lot of money as a result, according to details that were recently made public.

Each of the Connecticut banks shied away from an agreement for more than a year, according to a securities filing tied to the $759 million deal. Over that time, the $7.3 billion-asset United Financial’s valuation tumbled. What People’s United agreed in the end to pay for United Financial was 30% lower than an offer the companies discussed in July 2018.

What happened?

Concerns about credit quality at Hartford-based United Financial, along with its exposure to a clean-energy firm that filed for bankruptcy protection, were factors, the filing said. And, unlike other banks, United Financial shares struggled to rebound after the market swoon in late 2018.

Speculation that United Financial could sell began in March 2018 when a bank analyst suggested in a note to clients that the company had more value as a seller, mentioning Bridgeport-based People’s United as a possible match, the filing said.

Bill Crawford, United Financial’s president and CEO, called Jack Barnes, his counterpart at People’s United, after discussing the analyst’s note with his board. The executives met three times and spoke on the phone “several times” between March 28 and Aug. 16, the filing said.

United Financial’s board, with help from an investment bank, determined on June 7 that People’s United and another unnamed bank were the only financial institutions with the interest and capacity to pursue a deal.

Over dinner on July 10, 2018, Barnes told Crawford that People’s United was interested in a deal that valued United Financial at a 19.3% premium to United Financial’s stock price at the time, or a value of roughly $1.1 billion, based on an estimate of United Financial’s shares outstanding.

People’s United submitted a nonbinding, all-stock offer on Aug. 31 with a 22.9% premium and a valuation of about $1.1 billion. The other company sent an all-stock offer on Sept. 4 with an exchange ratio range that valued United at $1.1 billion to $1.2 billion.

After People’s United declined a request from United Financial to raise its offer, United Financial decided to hold exclusive negotiations with the other company. Additional due diligence made it clear to United Financial and the other suitor that a deal would not deliver the results they had originally expected, and United Financial decided to terminate discussions on Oct. 2.

United Financial, as a result, decided to refine its stand-alone, three-year operating plan.

Still, Crawford called Barnes on Oct. 16 to see if there was interest in revisiting a deal. Barnes passed, telling Crawford that People’s United was pursuing another acquisition, though he said he would “be open” to discussions after that deal closed.

People’s United would agree on Nov. 27 to buy BSB Bancorp in Belmont, Mass., for $327 million. That acquisition closed on April 1.

Banks stocks were punished in the fourth quarter. The filing notes that United Financial shares “experienced a material decline,” falling 13% over the last three months of 2019. More concern arose early this year when United Financial’s “stock price lagged behind its peer group,” prompting its board and management to “engage in robust conversations” about future performance.

Crawford and Barnes met in mid-February during a bank conference in Florida. Shortly afterward, People’s United’s investment bank told Crawford that there was interest in a deal with a 12.2% to 17.8% premium, or a valuation of $872.2 million to $915.5 million.

United Financial’s board decided on Feb. 26 to not pursue a merger. Instead, the directors hired a financial adviser to assess strategies United Financial could “feasibly implement” to improve shareholder value.

In early March, several banks disclosed exposure to the bankruptcy of the clean-energy firm DC Solar. United’s total exposure to the firm was $41.7 million on June 30, according to the recent filing.

The adviser’s recommendations, presented on May 10, were sobering. Without providing details, the filing stated that the plan had too many execution risks and “could not fully address fundamental issues relating to expected trends in the interest rate yield curve” and United Financial’s “below peer returns.”

United Financial on May 13 again asked its investment banker to evaluate potential acquirers. Five institutions, including People’s United, were identified. Three were not interested, and a fourth was unable to pay a premium.

That left People’s United as the only potential buyer.

Barnes on May 28 indicated that People’s United could pay an 8.1% premium, lowering the potential deal’s value to $734 million. United Financial’s board determined that, including potential losses from DC Solar, its “estimated stand-alone valuation was likely to be materially lower than the proposal from People’s United.”

People’s United lowered the exchange ratio of its offer again on June 28, though the overall deal value increased slightly due to some appreciation in United Financial’s stock price. People’s United, which planned to run off a number of noncore loans after closing the deal, “cited concerns about the credit quality” of United Financial’s loan portfolio.

People’s United was asked on July 3 to increase the ratio. It declined.

United Financial’s board unanimously approved the merger agreement on July 15. The deal, announced later that day, is the sixth-biggest bank merger of 2019. It priced United Financial at 135% of its tangible book value.

“With the fourth-largest deposit market share in the combined Hartford and Springfield market, a complementary array of commercial and retail capabilities and a shared legacy of community giving, United will solidify our presence in the central Connecticut market and strengthen our franchise in western Massachusetts,” Barnes said in a release announcing the deal.

People’s United plans to let $1.8 billion of United Financial’s loans run off. It would also sell $556 million in investment securities as part of a balance sheet restructuring.

People’s United expects the deal to be 5% accretive to its earnings per share. It should take slightly more than two years to earn back any expected dilution to People’s United’s tangible book value.

People’s United said it expects to incur $126 million in merger-related expenses. It plans to cut 55% of United Financial’s annual noninterest expenses, or roughly $88 million.