Wednesday, July 11, 2007

BMO Agrees to Buy Two Wisconsin Banks

  
Scotia Capital, 11 July 2007

Event

• Bank of Montreal announced July 10 two small acquisitions in Wisconsin for US$327.2 million representing 25.4x LTM earnings.

What It Means

• BMO continues to expand the Harris footprint with small high priced acquisitions with operating challenges. We view these acquisitions as mildly negative given price, low market share, difficult operating environment, execution risk and low expected shareholder return. These acquisitions also reaffirm BMO's statement that Harris is the key growth platform for the bank and it does not intend to sell its U.S. operations.

• In terms of deposit market share, BMO will have the number 9 position in Wisconsin and the number 6 position in Milwaukee, however, combined market share would be a modest 1.5% in Wisconsin and 3% in Milwaukee (as of June 2006).

• BMO is trading at a 5% P/E premium to the bank group on our 2008 earnings estimates with lower than industry average ROE and return on risk-weighted assets.

• Maintain 3-Sector Underperform.

BMO Announces Two Small Acquisitions in Wisconsin - Mildly Negative

• Bank of Montreal (BMO) announced july 10 two small acquisitions in Wisconsin for a combined US$327.2 million of which US$137.2 million will be paid in cash and US$190 million will be paid in stock. The purchase price represents 25.4x LTM earnings, 2.2x combined book value and a combined deposit premium of 19% (26% excluding US$0.5 billion in time deposits at MMBI).

• The bank expects that the acquisitions will exceed the 10% cost of capital. Excluding one-time costs, the transactions are expected to be mildly dilutive in 2007 and mildly accretive in 2008.

• BMO continues to expand the Harris footprint with small high priced acquisitions with operating challenges. We view these acquisitions as mildly negative given price, low market share, difficult operating environment, execution risk and low expected shareholder return. These acquisitions also reaffirm BMO's statement that Harris is the key growth platform for the bank and it does not intend to sell its U.S. operations.

Ozaukee Bank - Strong Brand, Affluent Market

• Ozaukee Bank is primarily a retail bank with 6 full-service and two limited-service locations with a strong brand in the high end area of Ozaukee. The bank has US$694 million in assets and US$561 million in deposits. Ozaukee Bank has 1.42% deposit market share in Milwaukee and 0.54% deposit market share in Wisconsin (as of June 2006).

MMBI - Weak Financial Performance = Potential Opportunity

• Merchants and Manufacturers Bancorporation (MMBI) is a bank holding company dealing primarily in commercial banking with 34 full-service locations and 11 limited-service locations. The bank's earnings have been weak in the past. Currently, MMBI has $1.5 billion in assets and $1.2 billion in deposits. MMBI has deposit market share of 1.58% in Milwaukee and 1.02% in Wisconsin (as of June 2006).

Combined Market Share Modest at 1.5% - 3%

• These acquisitions are BMO's first foray into the state of Wisconsin. The two acquisitions give the bank 40 full-service branches with 33 concentrated in the Milwaukee area. In terms of deposit market share, BMO will have the number 9 position in Wisconsin and the number 6 position in Milwaukee, however, combined market share would be a modest 1.5% in Wisconsin and 3% in Milwaukee (as of June 2006). The transactions are expected to close in late 2007.

Recommendation

• In our comment "BAC Acquires LaSalle - Harris Strategic Options" dated April 24, 2007, we stated that if we were to apply a 30% range deposit premium for Harris the value would be $12 per BMO share, approximately $6 billion or 17% of market capitalization, significantly below earnings contribution of 5%.

• BMO is trading at a 5% P/E premium to the bank group on our 2008 earnings estimates with lower than industry average ROE and return on risk-weighted assets.

• Maintain 3-Sector Underperform.
__________________________________________________________
The Globe and Mail, Tara Perkins, 11 July 2007

Bank of Montreal has not ruled out making a blockbuster acquisition in the U.S., but none have come its way.

Yesterday, the bank gobbled up two small regional players for nearly $330-million (U.S.), pushing it into Wisconsin for the first time.

"We're always looking at acquisitions, whether they're smaller ones like this or larger ones," Ellen Costello, chief executive officer of BMO's U.S. subsidiary Harris Bankcorp Inc., said in an interview.

Any opportunity would have to meet all of the bank's criteria, including the right price and having a strong cultural fit, she said. No large bank seems to make the cut at the moment.

BMO did take a look at LaSalle Bank, one of its major Chicago-area rivals that is up for grabs. LaSalle, the U.S. bank owned by Dutch giant ABN Amro, is the No. 2 bank in the area, while Harris is No. 3, based on the amount of deposits. LaSalle is in the midst of a takeover battle that will likely see it acquired for more than $20-billion.

Ms. Costello said Harris looks at everything that's available in the market, and noted LaSalle is a well-regarded competitor.

BMO said yesterday it will pay $190-million in stock for Milwaukee-based Ozaukee Bank, which has six full-service branches and $694-million in assets.

It also announced a deal to buy Wisconsin-based Merchants and Manufacturers Bancorporation Inc. for $137.2-million in cash, or $37.30 per share. Merchants and Manufacturers is a holding company that has six bank subsidiaries which together operate 34 full-service locations. Combined, the six subsidiaries have $1.5-billion in assets.

"Merchants and Manufacturers' emphasis on serving small and mid-market commercial customers complements our recent addition of our business banking services in the greater Milwaukee area," Ms. Costello said.

About Ozaukee Bank, she said "when you consider that Ozaukee County has the second-highest median household income in the state, we believe the combined power of our two banks will deliver tremendous results for customers in this market. In particular, we see this as an attractive market for our wealth and business banking capabilities."

UBS analyst Jason Bilodeau said in a note the "synergies are likely to be limited and risks slightly higher for an out-of-market deal, but management suggests each bank is well-positioned in good markets with an attractive deposit base." He said the move suggests BMO is able to speed up its U.S. growth through acquisitions. "Most importantly, we believe this demonstrates that management remains firmly committed to its U.S. retail strategy and will continue growing the platform through organic growth, additional bolt-on acquisitions and, under the right circumstances, potentially larger transactions."

Both deals are expected to close later this year, and are subject to approvals from regulators in the U.S. and Canada as well as the shareholders of the target banks.

Ms. Costello said BMO is still looking for acquisitions. Indiana and Wisconsin are two areas where she sees opportunities. Harris has more than 230 locations in Illinois and Indiana, and aims to bulk up to between 350 and 400 locations across the U.S. Midwest. It has $42-billion (U.S.) in assets and $29-billion (U.S.) in deposits.

• BMO's U.S. presence

Illinois & Indiana

Through its American franchise, Harris Bank, BMO operates more than 230 locations in Illinois and Indiana, with a long-term target of 350 to 400 locations in the U.S. Midwest. Harris has annual revenue of $1.3-billion (U.S.) and is concentrated in the Chicago area, with 9.8 per cent of deposits in the city's banks. Total assets amount to $42-billion and total deposits are $29-billion.

Wisconsin

Ozaukee Bank has six full-service and two limited-service locations in northern Milwaukee. Ozaukee leads other banks in its county with $561-million in deposits and $694-million in assets. Merchants and Manufacturers Bank has 34 full-service and 11 limited-service locations through six subsidiaries in the Milwaukee area. Assets total $1.5-billion and the bank holds $1.2-billion in deposits.
__________________________________________________________
Financial Post, Duncan Mavin, 11 July 2007

Bank of Montreal has bought two banks in Wisconsin to add to its U.S. operations, showing its ambitions in the Midwest are not dented by the possible intrusion into the region of retail-banking giant Bank of America.

The two deals will cost BMO a combined $340-million in stock and cash and will boost the size of the branch network at BMO's Chicago-based Harris Bank by 16%, or 40 full-service branches and 13 other locations.

The deals announced yesterday for Merchants and Manufacturers Bancorporation Inc. and Ozaukee Bank, both located in the Milwaukee area, will add US$1.75-billion in deposits, bumping Harris's total deposits by 10%.

BMO's first forays into Wisconsin will position Harris as the ninth-largest institution by deposit market share in the state, and the sixth-largest bank by deposit market share in Milwaukee.

There has been some recent speculation the bank's ambitions would be stalled by Bank of America's proposed US$21-billion purchase of LaSalle Bank, which is a significant player in the same "Chicagoland" market as Harris.

LaSalle would add 151 branches to the 56 Bank of America owns in Chicago. A deal, if it goes through, is expected to intensify the already fierce competition in the Chicago banking sector, and some observers had suggested it would also stifle Harris' plans in the region because it could push up the price of smaller, target banks. But Harris's latest purchases appear to show the bank is sticking to its growth plan, said banking analysts.

"We believe [the deals] demonstrate that management remains firmly committed to its U.S. retail strategy and will continue growing the platform through organic growth, additional bolt-on acquisitions and, under the right circumstances, potentially larger transactions," said UBS Investment Research analyst Jason Bilodeau.

"We do not anticipate a material contribution to earnings but do believe that these announcements indicate BMO will continue to focus on growing its U.S. operations through additional acquisitions," said Dundee Securities analyst John Aiken.

Harris Bank chief executive Ellen Costello said competition throughout the mid-west is tough but management is not deterred from making further deals in the region.

Ms. Costello, a former investment banker with years of merger and acquisitions experience, was installed in the Harris hot seat last July.

One of her main tasks is to grow Harris to its stated goal of 350 to 400 locations across the Midwest.

Including yesterday's acquisitions, the Harris network has increased by more than 70 branches, or about a third, since Ms. Costello took over the reins.

UBS's Mr. Bilodeau said the Wisconsin purchases, along with the September 2006 acquisition of First National Bank & Trust for US$290-million, will "be a test of management's ability to accelerate the pace of acquisition growth and to deliver improved operating results."

"Synergies are likely to be limited and risks slightly higher for an out of market deal," he said.
__________________________________________________________
Financial Post, Duncan Mavin, 10 July 2007

BMO's acquisition of two Wisconsin-based banks to add to its Chicago-based retail banking franchise show that it “will continue to focus on growing its U.S operations through additional acquisitions,” says Dundee Securities analyst John Aiken.

The two banks, Ozaukee Bank and Merchants and Manufacturers Bancorp, will cost BMO a combined $340-million in cash and stock, and add more than US$2-billion in assets, or 10%, to the U.S. growth platform.

BMO’s Harris bank franchise will gain a further 40 full-service branches and 13 other locations and marks the banks entry into Wisconsin. The acquisition grows the total number of Harris Bank branches by 16%.

“It’s a relatively low amount of capital expended to gain access to a third contiguous state for Harris,” says Mr. Aiken. “Each platform allows for additional cross-selling potential,” he adds.

The Dundee analyst says the the outlook on the deals is modestly positive. His 12-month target price for BMO is unchanged at $75.
__________________________________________________________
Bloomberg, Doug Alexander and Sean B. Pasternak, 10 July 2007

Bank of Montreal, Canada's fourth-largest lender, agreed to buy two Wisconsin banks for $327.2 million, its biggest consumer-banking investment in more than a decade.

Bank of Montreal offered $190 million in stock for Ozaukee Bank, and $137.2 million in cash for Merchants and Manufacturers Bancorporation Inc., the Toronto-based bank said today in statements. The purchases are the first in Wisconsin for Harris Bank, and will increase its U.S. branches by more than a fifth.

``It's demonstrating that they're committed to their U.S. retail strategy,'' said UBS Canada analyst Jason Bilodeau, who rates Bank of Montreal a ``neutral 2'' and doesn't own the stock. ``They've indicated that they want to accelerate the pace of bolt-ons and this may be the first indication of that.''

Bank of Montreal is trying to reverse a slump in U.S. consumer banking, where profit has declined since fiscal 2005. The bank has spent about C$1.5 billion ($1.4 billion) on U.S. banks since 2000 to expand Chicago-based Harris. Ozaukee has eight offices and Merchants has 45, boosting Harris Bank's network to 285 branches in the U.S. Midwest.

Bank of Montreal offered $37.30 a share for Merchants, or 33 percent more than yesterday's closing share price of $28. Stock of the New Berlin, Wisconsin-based bank rose $8.05, or 29 percent, to $36.05 at 3:38 p.m. in over-the-counter trading. Bank of Montreal fell 27 cents to C$69.10 at 4:10 p.m. on the Toronto Stock Exchange.

``What this does for us is add another diversifying element to our footprint in another attractive market,'' Harris Bank Chief Executive Officer Ellen Costello said in an interview. ``This should be evidence that we're serious about growing.''

Merchants has $1.5 billion in assets and $1.2 billion in deposits, with half near Milwaukee. The company had net income of $4 million in 2006, 22 percent less than in 2005.

Ozaukee investors will get about 3 million Bank of Montreal shares as part of the transaction, the bank said. Ozaukee Bank, based in the Milwaukee area, has $694 million in assets and $561 million in deposits.

Chief Executive Officer William Downe, who took over the top job in March, has said that he wants Bank of Montreal to have between 350 and 400 U.S. branches within four years. Last August, the bank promoted Costello to head the U.S. consumer bank to help make acquisitions.

``When Bill Downe was appointed, the U.S. was going to become more important,'' said John Aiken, an analyst at Dundee Securities in Toronto. ``He is an American, and he spent a lot of time down in Chicago, so it stands to reason that this is probably in his comfort zone.''

The takeovers may increase U.S. assets and deposits by about 10 percent, Aiken said today in a note to clients. The acquisitions make Harris the sixth-largest bank for deposits in Milwaukee and ninth in the state, Costello said.

The two acquisitions are the largest consumer-banking investment for Bank of Montreal since its C$378 million purchase of Household Bank in 1996, according to the bank's Web site. In January, Bank of Montreal acquired Indiana's First National Bank & Trust for about C$342 million.

Harris Bank has been ``actively talking'' with other U.S. Midwest banks about takeovers and would consider something larger, Costello said. Harris would consider more takeovers in Illinois and plans to buy more banks or open new branches in Indiana and Wisconsin, she said. Bank of Montreal has ``C$2 billion plus'' in excess cash that could be tapped for acquisitions, she said.

Earnings from U.S. consumer banking, where Bank of Montreal receives less than 5 percent of its annual profit, fell 3.6 percent to C$27 million in the fiscal second quarter, as the Canadian currency surged 6.2 percent relative to the U.S. dollar.

``We've been suffering in the last 18 to 24 months from a slowing real estate market, which has affected us on both the consumer and commercial side,'' Costello said. ``The tactic we've taken is to be really aggressive on managing our costs.''
;