What’s next for M&T and largest shareholder?
Options abound for sale of Allied Irish stock
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By Jonathan D. Epstein / Buffalo News October 3, 2010,
buffalonews.com
OK, now what? That’s the question investors and analysts are asking about M&T Bank Corp. and its largest shareholder, Allied Irish Banks PLC.
With the apparent collapse of talks between Buffalo-based M&T and Spain’s Banco Santander SA, M&T and AIB are back where they were several months ago.
That is, they’re trying to figure out how to quickly unload billions of dollars worth of M&T shares without upsetting the market and hurting M&T.
And the clock is ticking. Allied Irish is under pressure to sell its $2.2 billion stake in M&T by the end of the year.
While their options are generally well-known — find another bank to buy it, get a handful of other major investors to split it, or disperse it in a broad public offering—AIB isn’t discussing its plans, leaving everyone guessing.
Here’s the problem: Dublin-based AIB owns 26.7 million shares of M&T, or 22.4 percent of the outstanding stock. That’s a legacy from its sale of Baltimorebased Allfirst Financial to M&T in 2003. At M&T’s current price, that investment is worth $2.2 billion.
But selling a stake that large poses a big challenge for AIB and M&T.
With that many shares, the sheer size of the potential sale significantly limits the options the banks have for disposing of it without weakening M&T’s share price. That’s why the original 2003 agreement between M&T and AIB contained some protections for M&T, including the right to be consulted by AIB before unloading the stock and the right to buy the stock itself.
If AIB simply sold the stock on the open market, it would flood the market with M&T shares that currently are not in circulation. That could depress the share price significantly and harm its current shareholders — including its top executives. CEO Robert G. Wilmers is the third-biggest shareholder, after AIB and Warren Buffett’s Berkshire Hathaway. Berkshire owns The Buffalo News, and Buffett is the newspaper’s chairman.
AIB also could try a broad stock offering, like an IPO, to sell the shares on the open market to as many investors as possible. That would be more planned, organized and controlled than an open-market sale, but is also complex and risky. It also could have the same effect on existing shareholders as selling on the open market — more shares in circulation could drive down the price of M&T stock.
Another option is that M&T could exercise its own right of first refusal and
gain control of the shares. Under this scenario, M&T then would hold its own stock offering to sell the shares to other investors.
The effect on existing shareholders, however, would be the same as if Allied Irish did the offering itself: More shares on the market likely depressing the price of all M&T shares.
Alternatively, the two banks could seek out other major M&T shareholders to buy it, such as Buffett. But few shareholders are able or willing to absorb that much.
Or it could find another single buyer for the entire stake, most likely another bank. That would have been the easiest option for AIB, since it would involve just one transaction with just one other party. But depending on the buyer, it could also expose M&T to an unfriendly investor or even a hostile takeover. Hence the need for the protections for M&T that were built into the original 2003 agreement with AIB.
And if the buyer was an M&T ally, any heavy-hitting investor also would face the same issue as Santander executives: Owning a hefty chunk of M&T worth billions of dollars, but one that still was not big enough to give them control over the bank.
That’s the backdrop in which M&T and Santander found themselves discussing a deal on and off for several months. Talks called for M&T to purchase Santander’s under-performing U. S. subsidiary, Sovereign Bancorp, to create a combined U. S. bank under M&T’s management. It would have been twice the size of either bank currently, and would have ranked within the top 10 U. S. banks by deposits.
In exchange, Santander would have received a stake in M&T, and would also have purchased the AIB stake. In one swoop, that would have given M&T a major growth engine in New England and New Jersey, while removing the uncertainty surrounding the AIB investment.
But unlike AIB, Santander wasn’t content to be a passive, advisory investor. It wanted to control M&T as a full subsidiary, and M&T wanted nothing to do with that. As a result, talks broke down.
Unless another friendly bank buyer comes along suddenly, AIB is back to looking at the other options. A broad stock offering that would disperse the shares among many investors is likely the most desired option for M&T. That would protect M&T’s independence now, and also eliminate the risk of a similar situation arising in the future.
Alternatively, M&T could try to round up a few key investors, presumably including Buffett, to snap up the stock from AIB. At least one analyst is already speculating on that.
Or it could try to raise enough cash to buy the stock itself, which is also the subject of speculation.
But M&T, while well-capitalized, doesn’t have a lot of extra money lying around, especially not $2.2 billion.
With three months to go, a decision and announcement are likely soon. And regardless of what decision AIB and M&T make, it will be widely watched, not only globally, but especially here in Buffalo.
None of this had been desired by either AIB or M&T. The two banks have had a very strong and friendly relationship for seven years, with each bank having seats on the other bank’s board of directors, providing input and supporting their efforts. Neither side felt a need to end that.
But AIB’s lending and capital woes during the global financial crisis forced it to seek a massive $2.8 billion bailout from Ireland, which is now a major shareholder with 18.7 percent of the company.
To raise the money, AIB has to sell off significant chunks of its non-Irish business, including its operations in the United Kingdom and Poland, as well as the M&T investment. It already sold the Polish investment, a 70 percent stake in Bank Zachodni WBK S. A., to Santander for $3.9 billion. And it appeared for a while that Santander would also provide the solution for M&T.
But even those efforts are not going to be enough. Irish Finance Minister Brian Lenihan announced a second bailout of AIB on Thursday that will give the country majority control over the bank.
AIB will sell $7.3 billion in stock in November, and Ireland will not only guarantee the sale but may end up holding more than a 90 percent stake in the bank. |
