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On Monday, Judge J. Travis Laster of Delaware Court of Chancery gave his judgement over the lawsuit filed by the investors in the trust-preferred securities (TruPS) debt under the BB&T-BankAtlantic deal. The judge has permanently prohibited the deal under which, BankAtlantic, a wholly owned subsidiary of BankAtlantic Bancorp Inc. , was supposed to sell most of its banking assets to BB&T Corporation (BBT - Analyst Report).

Earlier on November 1, 2011, BB&T announced its plan to acquire BankAtlantic. Under the terms of the deal, the company was supposed to acquire $2.1 billion in loans and $3.3 billion in deposits (90% core and low-cost funds) for $301 million premium, representing 9.05% of the deposits at BankAtlantic on September 30. However, deposit premium may rise or fall depending on the amount of deposits at BankAtlantic prior to the closing of deal, but it will not exceed $315.9 million.

However, BankAtlantic Bancorp’s strategy was to hold on nonperforming and criticized loans worth $623 million and sell off $2.1 billion in assets to BB&T. Moreover, the company has no plans to pay off $289 million in principal TruPS debt owed by the holding company.

Therefore, in November 2011, a group of corporate debt investors of BankAtlantic filed a lawsuit against the firm to stop it from selling its loans, deposits and branches to BB&T. These investors believed that this sale infringes the terms of their creditors’ agreement. Finally, the investors have won the ruling as the judge has permanently forbidden the deal.

Charges Against the Deal

In the first opposition to the deal, the plaintiffs accused both BB&T and BankAtlantic of structuring the transaction in such a way that the acquirer could evade TruPS obligations. They charged the parent company, BankAtlantic Bancorp, of breaching an agreement, stating that the transfer or sale of majority of its assets will not happen without ensuring that the acquirer will also assume TruPS.

However, BB&T’s deal would transfer nearly 83% of BankAtlantic assets, without assuming the TruPS. Hence, the plaintiffs want either TruPS to be included in the agreement or the deal to be blocked.

The plaintiffs also stated that following the closure of the transaction, BankAtlantic Bancorp would become a holding company with no branches and will own large amounts of nonperforming loans and foreclosed real estate assets. Therefore, the company will no longer resemble its present operations.

The lawsuit against BB&T-BankAtlantic transaction was filed in Delaware Chancery Court by Hildene Capital Management and Alesco Preferred Funding. Both Hildene and Alesco are indirect beneficiaries to BankAtlantic’s TruPS.

Similar Opposition Before

Earlier in 2010, BankAtlantic faced similar opposition related to its TruPS. At that time, the company had tried to repurchase nearly $230 million of these securities at a discount to boost its capital levels. However, the offer was withdrawn following strong oppositions from certain section of investors.

The judge claimed that the sale of all BankAtlantic’s branches and deposits, along with most of its assets to BB&T would breach the terms of TruPS corporate debt. According to the ruling, the debt should either be repaid or acquire by BB&T.

Therefore, the ruling put forward by the judge warns all bank holding companies not to evade repayment of TruPS debt while selling their banks. However, ruling in favor of BankAtlantic Bancorp would have dissuaded the investors from helping the banks to raise capital with TruPS.

Our Viewpoint

The BB&T-BankAtlantic deal was expected to be highly advantageous to both the companies. For BankAtlantic, the agreement was expected to resolve some of its balance sheet and higher operating expense related problems.

For BB&T, the transaction was expected to enable it to speed up its expansion strategy in Florida region. Also, the deal would have added 78 branches to BB&T’s 64-branch network in Florida region. Besides substantially increasing BB&T’s market share and footprints, the acquisition would have improved the company’s top line over the medium term.

However, the judge should consider investors’ interest and come up with proper solutions to maximize the profits of all the concerned parties.

BB&T currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the shares.

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