TD’s axed U.S. acquisition not a good look: DBRS

The cancelled deal between TD Bank and First Horizon Corp. stokes investor anxiety about the U.S. banking industry, and raises questions about the players themselves, says DBRS Morningstar in a new report.

After an initial delay in securing regulatory approval, and amid concerns about meeting the revised deadline, TD and First Horizon agreed to call off their planned US$13.4 billion deal earlier this week.

DBRS said that, until the banks called it quits, it expected the transaction to close at a lower price than initially agreed, given the shift in bank valuations that has occurred since the deal was first announced in early 2022.

Instead, “the termination of the deal… comes at an inopportune time for the U.S. banking sector, as some regional bank stocks remain under severe pressure despite most having reported solid earnings and credit fundamentals in [the first quarter],” the rating agency said in its report.

“The overall impact on the U.S. banking sector continues to play out, but we view this event as further increasing investor and customer anxiety in an already volatile environment,” it said.

At the same time, DBRS said that the failed deal also raises red flags about a potential issue between U.S. banking regulators and TD — particularly as other large deals were granted regulatory approval at around the same time.

The episode also “raises questions regarding the coordination and preparedness of the regulators themselves,” DBRS said.

“Given the now volatile operating environment, we would have thought the regulators would have prioritized this approval instead of placing First Horizon in a weaker position and providing additional negative headlines for the U.S. banking sector,” it noted.

First Horizon walks away from the failed deal with a US$200 million breakup fee, “but is now operating independently in a very difficult operating environment that has targeted mid-sized regional banks,” the report said.

As for TD, the rating agency said that the collapse of this deal may also temporarily hinder its appeal to future U.S. acquisition targets.

“Following this event, a potential concern is that sellers may be wary of partnering with TD if they fear the deal may not close as expected and chose a different partner,” it said.

These concerns “will likely dissipate as a result of TD’s status as a global systemically important bank, its strong track record of performance, and success with prior acquisitions,” DBRS concluded. “As such, we view TD and its excess capital as well-positioned to execute on future deal opportunities.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.