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Blockbuster Merger: BB&T, SunTrust to Create 6th Biggest US Bank

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BB&T Corporation BBT and SunTrust Banks STI have announced an agreement to merge, which will create the sixth-largest commercial bank in the United States (in terms of assets and deposits). The all-stock deal, expected to close in the last quarter of the year, is valued at $66 billion.

The combined company will have nearly $442 billion in assets, $301 billion in loans, and $324 billion in deposits and will serve more than 10 million households in country, with leading market share in several attractive, high-growth markets.

The transaction still requires approvals of shareholders of both the banks and customary regulatory consent.

Since the announcement, shares of both BB&T and SunTrust has been moving north.

“Merger of Equals” Deal Details

Under the terms of the agreement, shareholders of SunTrust will receive 1.295 shares of BB&T for each SunTrust share they own. Besides, BB&T shareholders will own nearly 57% and SunTrust shareholders will own roughly 43% of the combined company, which will be based in Charlotte, NC. The combined bank will maintain the Community Banking Center in Winston-Salem, NC and the Wholesale Banking Center in Atlanta, GA.

In a reflection of the “merger of equals” deal, the combined company will operate under a new name and brand (to be determined prior to closing). Further, the new bank's 14 board of directors will be evenly split between the two companies.

Kelly S. King, Chairman and CEO of BB&T, will serve as Chairman and CEO of the combined company till Sep 12, 2021, after which he will be Executive Chairman of both entities till Mar 12, 2022.

William H. Rogers, Jr., Chairman and Chief Executive Officer of SunTrust will serve as President and Chief Operating Officer of the combined company till Sep 12, 2021, afterwhich he will become CEO of the combined bank. Further, on Mar 12, 2022, he will also become Chairman and CEO of the combined company.

An Accretive Deal

The transaction is expected to result in one-time pre-tax merger expense of $2 billion. Also, it is expected to generate an internal rate of return of nearly 18%.

Additionally, the deal is expected to lead to revenue synergies, though the same has not been included in the deal. The merger will also lead to pre-tax cost savings of $1.6 billion (net of investments), which will be fully realized by 2022. This represents approximately 12.5% of combined expenses.

Further, the merger will result in earnings accretion for the shareholders of both the companies. In 2021, GAAP and cash earnings per share (EPS) accretions are projected to be approximately 13% and 17%, respectively, for BB&T shareholders.

For SunTrust shareholders, GAAP and cash EPS accretions are expected to be nearly 9% and 16%, respectively, in 2021. Moreover, the shareholders of SunTrust will receive a 5% hike in their dividend following consummation of the transaction based upon each bank's current dividend per share.

Notably, share repurchases have been suspended by both companies till the closure of the transaction.

Our Take

Following the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May last year, the banks with assets between $100 billion and $250 billion will be eventually exempted from being labeled as systemically important financial institutions (SIFI). This has created a unique opportunity for such companies.

Further, lower corporate tax rate freed up capital, which, along with lesser regulations, was expected to lead to a wave of M&As in the banking industry.

The merger between BB&T and SunTrust seem to be driven by these factors. Though the combined company will cross the SIFI threshold, it will lead to increased growth prospects and creation of shareholder value.

Further, the combined company will likely give tough competition to some of the nation’s biggest banks including Bank of America BAC and Wells Fargo (WFC - Free Report) in terms of deposits per branch.

Over the past year, shares of BB&T and SunTrust have lost 2.8% and 3.4%, respectively. This compares with industry’s decline of 7.7%.

Currently, both BB&T and SunTrust carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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