Comerica Inc. agreed to buy Sterling Bancshares Inc. for more than $1 billion in stock to bolster its position in Texas, opening the account for U.S. bank M&As this year.
Deals in the banking sector are expected to gather steam as banks with high capital ratios such as BB&T Corp., SunTrust Banks, U.S. Bancorp and PNC Financial Services look to consolidate their positions.
"The Sterling-Comerica deal is definitely an indicator of the increase in 2011 M&A activity that we are expecting," analyst Scott Valentin of FBR Capital Markets said.
"With loan portfolios shrinking and weak loan demand, banks would be looking at acquisitions that prove to be accretive to their earnings," Valentin added.
The deal will double Dallas-based Comerica's presence in Houston and provide it an entry into the San Antonio market.
Comerica, with about $55 billion in assets, has the third largest presence in the Texan market, just behind JPMorgan Chase & Co. and Bank of America Sterling ranks No. 15, according to the Texas Department of Banking.
Sterling's "very attractive deposit base" will help Comerica offer a wide range of products, particularly to middle market and small business companies, Comerica's CEO Ralph Babb said.
The deal, once through, will put an end to Sterling's proxy battle with its largest shareholder, TAC Capital, which was pushing for five board seats.
Privately owned investment firm TAC has about 9.9 percent stake in Sterling.
As part of the deal, each Sterling common share will get 0.2365 common share of Comerica. Based on Friday's closing prices, the offer values Sterling shares at about $9.94 each, a premium of about 29 percent.
Comerica is paying a higher price than what Sterling is worth, said analyst Terry McEvoy of Oppenheimer. This signals how serious Comerica is about growing in the state of Texas.
The transaction is expected to close by mid-2011 and will be break even to Comerica's earnings in the first full fiscal year, Comerica said in a statement.
Comerica reported better-than-expected fourth-quarter results as it set aside less money to meet losses from bad loans. Sterling reported an in-line quarter with earnings of 2 cents a share.
Comerica's provision for bad loans fell 77 percent in the quarter to $57 million. The company also doubled its quarterly dividend to 10 cents a share for the fourth quarter.
Sterling shares rose 23 percent to $9.50 in pre-market trade. Comerica fell 6 percent to $39.75.
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