NEW YORK -(Dow Jones)- Compass Bancshares Inc.'s (NASDAQ-NMS:CBSS) (CBSS) agreement Friday to be bought by a Spanish bank is the latest in a parade of richly valued Texas bank acquisitions, and it left investors pondering which bank will be the next to get gobbled up.
Banks from around the U.S. - and the world - are crowding into Texas because of its fast-growing and diverse population and economy. Unlike some other Sunbelt states, Texas is home to an array of industries, largely insulating its economy from the cooling housing market that is sapping growth in states like Florida.
Spain's Banco Bilbao Vizcaya Argentaria SA (NYSE:BBV) (BBV) is snapping up Compass at a hefty premium of about 20 times the bank's projected 2007 earnings. That follows BBVA's pair of pricey purchases in Texas last summer. Since 2005, more than 50 Texas banks have been acquired, according to Thomson Financial.
"There is a land grab going on," said Jefferson Harralson, a Keefe Bruyette & Woods analyst. "Texas M&A is hot and probably will continue to be."
Indeed, there's plenty of room left for consolidation - there were 703 Texas- based banks registered with the Federal Deposit Insurance Corp. as of June 30. That's down from 954 a decade earlier, but it still leaves Texas with the second-most banks in the country (Illinois has 747).
Handful Of Candidates
Only a handful of the independent Texas lenders have enough heft to interest big banks like JPMorgan Chase & Co. (NYSE:JPM) (JPM), Wells Fargo & Co. (NYSE:WFC) (WFC), SunTrust Banks Inc. (NYSE:STI) (STI), Royal Bank of Canada (NYSE:RY) (RY) and Comerica Inc. (NYSE:CMA) (CMA), which are said to be on the lookout for acquisition opportunities.
Bankers and analysts point to Cullen/Frost Bankers Inc. (NYSE:CFR) (CFR), Sterling Bancshares Inc. (NASDAQ-NMS:SBIB) (SBIB), Prosperity Bancshares Inc. (NASDAQ-NMS:PRSP) (PRSP) and Texas Capital Bancshares Inc. (NASDAQ-NMS:TCBI) (TCBI) as possible targets. Montgomery, Ala.-based Colonial Bancgroup Inc. (NYSE:CNB) (CNB) is another possible candidate thanks to its presence in Texas and Florida. Representatives of Sterling, Prosperity, Texas Capital and Colonial weren't immediately available to comment Friday. A Cullen/Frost spokeswoman had no immediate comment.
All five of the banks saw their stock prices jump Friday. Ironically, that higlights the biggest obstacle to deals: shares of Texas banks are expensive. For example, shares of both Sterling and Prosperity trade at around 17 times their projected 2007 earnings. While BBVA, like other European banks, enjoys extra purchasing power in the U.S. thanks to the weak dollar, a number of U.S. banks balked at Compass' price tag, according to a person familiar with the matter.
"It's discouraging to the domestic buyers, because they're not going to pay that much," said Dory Wiley, president of Samco Capital Markets Inc., a Dallas- based investment bank.
Cold Shoulder From Cullen/Frost
Still, some big banks could afford to pay a premium for a coveted franchise. Cullen/Frost is at the top of most shoppers' wish-lists, according to investment bankers and analysts. The San Antonio-based holding company for Frost National Bank (NYSE:CFR) is the largest Texas-headquartered bank, with 2.3% of total deposits in the state, according to the FDIC, and branches clustered in the state's top metro areas.
Cullen/Frost's chief executive, Richard W. Evans Jr., was 59 years old as of March, and he doesn't have someone lined up to succeed him. Evans owns about 1.2% of the bank's outstanding stock, and the bank's 78-year-old senior chairman owns another 2%. The lack of a clear successor and significant stock holdings among aging executives are a recipe for dealmaking, bankers say. Indeed, Compass CEO D. Paul Jones Jr. is 64 years old, had no successor and owned about 1.6% of the company's outstanding shares.
But Cullen/Frost hasn't shown any willingness to sell out. The bank prides itself on being the sole remaining Texas lender that made it through the savings-and-loan crisis of the 1980s. Management has repeatedly rebuffed suitors over the years, bankers say.
The company "is so stubbornly independent that people have given up talking to them," said Curtis D. Carpenter, a managing director at Sheshunoff & Co. Investment Banking in Austin. In fact, Cullen/Frost last year bought Summit Bancshares Inc. of Fort Worth, signaling to some observers that the bank is determined to stay independent.
The Compass deal also fueled speculation that Colonial could end up for sale. The Montgomery, Ala.-based bank has the bulk of its business in in Florida and Alabama, but it also has about a dozen branches in both Texas and Nevada.
Colonial's longtime CEO, Robert E. Lowder, was 63 years old as of the company's March proxy statement. He has no clear successor and owns about 4.3% of Colonial's total outstanding stock.
Cullen/Frost and Colonial are the only two large franchises left with enough deposit-gathering capability to interest large bidders, said Andrew B. Collins, a Piper Jaffray analyst. He upgraded Colonial on Friday in part because the Compass deal added to Colonial's "scarcity value." Colonial's stock climbed 3.4% Friday.
Sterling, whose shares rose about 1% but remain cheaper than some peers, is also attractive thanks to its presence in Houston and other major metro areas. While Sterling's CEO, J. Downey Bridgwater, is only 48, management has shown an openness to at least talk with potential suitors, said Carpenter, the Sheshunoff banker. He called Sterling "a prime candidate" to get acquired.
Analysts and bankers say Texas Capital, based in Dallas, may find itself under pressure to sell. Despite a 15% surge in the past few weeks, the bank's stock is flat from a year ago and down about 9% from two years ago.
"At some point, they've got to get a return to their investors," said Wiley, the Samco banker.
-By David Enrich, Dow Jones Newswires; 201-938-2123; david.enrich@dowjones.com
(END) Dow Jones Newswires 02-16-07 1430 Copyright (c) 2007 Dow Jones & Company, Inc.
