Tuesday, July 12, 2005

Here Come the Canadians

Forbes, Liz Moyer, 12 July 2005

Toronto-Dominion Financial Group, the third-largest Canadian bank, continues a major remake south of the border--in the U.S.

After agreeing to sell its TD Waterhouse discount brokerage to Ameritrade Holding for $2.9 billion last month, the holding company for Toronto-Dominion Bank on Tuesday announced a $1.9 billion acquisition of Hudson United Bancorp, a small New Jersey bank that lately has had run-ins with regulators.

Toronto-Dominion has desired a consumer and business banking presence in the U.S., but failed to gain an entry point until March, when it closed a deal to acquire 51% of Portland, Maine's Banknorth. That deal brought it into New England, a hotly contested market where Banknorth has been trumpeting itself as the local community bank optionto big out-of-state banks, such as Bank of America.

But more important for TD Bank and for the newly named TD Banknorth, their partnership meant the potential to push south into the red-hot mid-Atlantic market. TD Banknorth, with the benefit of parent TD Bank's deep pockets, is buying Hudson United at a 15% premium to Hudson's closing stock price Monday, financing the cash portion of the deal by selling some 29 million shares of its stock to TD Bank for $940 million.

"Today's announcement is the right next step" in pursuing our U.S. strategy, said Ed Clark, Toronto Dominion's chief executive, during a conference call.

TD Bank appears to be pursuing a strategy of taking stakes in U.S. companies with the goal of assuming greater ownership later. It will retain 32% of the combined TD Ameritrade once that deal is closed, with the option of acquiring up to 39.9% in the first two years and up to 45% in 10 years.

In acquiring the majority stake of Banknorth for $3.8 billion, TD Bank has the option of acquiring 15.7% more on the open market. After the Hudson United deal it will own 55% of Banknorth, and Clark said on the conference call that he would seek opportunities to continue to acquire more of that company.

TD Bank's U.S. strategy stands apart from those of its big Canadian rivals, Bank of Montreal and Royal Bank of Canada.

Bank of Montreal has for decades owned Chicago-based Harris Bank outright and has been eagerly and aggressively expanding its presence in the Midwest. Royal Bank paid $2.2 billion to acquire Rocky Mount, N.C.-based Centura Banks in 2001 with an eye to expanding in the fast-growth U.S. Southeast.

But where Bank of Montreal has succeeded, Royal Bank has stumbled. Last year, it shook up the management of its RBC Centura unit, wrote down more than $100 million in its U.S .mortgage operations and cut 1,660 jobs.

TD Bank has flirted with U.S. expansion in the past only to shy away. It had a deal to offer banking services through 100 Wal-Mart Stores locations, but cancelled the agreement in 2003 when it failed to overcome regulatory obstacles.

Banknorth gives it a second chance. The company has been an active acquirer itself, with 12 deals in the last 11 years, the biggest of which was a $735 million deal for American Financial Holdings of Connecticut in 2003.

Led by the charismatic Bill Ryan as its chief executive, Banknorth has spread south into Massachusetts and Connecticut. But to achieve his ambitions of growing from a $30 billion asset bank to a $70 billion asset bank (or even bigger), Ryan needed the deeper pockets of a bigger partner.

In selling the majority interest to TD Bank, he said he will have the chance to look at bigger deals than he might have otherwise considered. "That was the rationale for the TD Banknorth combination," he said Tuesday. Without TD, "we would not have been able to structure a 49% cash transaction."

With the addition of Hudson United, which isbased in Mahwah, N.J., TD Banknorth would have $41 billion of assets, $27 billion of deposits and 590 branches. It takes TD Banknorth into the affluent Connecticut suburbs bordering New York and into Philadelphia, New York City and southern New Jersey.

Still, there are some red flags. Hudson United got tripped up by the more stringent reporting requirements of the Bank Secrecy Act and is under scrutiny for its money-laundering controls. It is operating under a cease and desist order by the Federal Deposit Insurance Corp.