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Merger arbitrage traders were expecting hiccups in Toronto-Dominion Bank’s proposed takeover of First Horizon Corp., but they were unprepared for what happened on May 5 when the US$13.4 billion transaction melted down.
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The deal spread had been widening in recent months, as some traders were anticipating a price cut. But a total collapse weeks ahead of the May 27 deadline was not in the cards. Now, these traders are desperately seeking protection in a market that’s reluctant to give it as First Horizon shares nosedive.
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“It’s painful,” said Cabot Henderson, who focuses on arbitrage and special situations at JonesTrading. “The pain comes from arbs who were generally positioning for a price cut and not a full break, and are now scrambling to limit downside in an industry experiencing a rolling crisis.”
The banks scrapped the proposed takeover early on May 4 after they said they couldn’t see a clear path to regulatory approval. That slammed First Horizon shareholders, who had already endured a month-long roller-coaster ride with the stock trading as high as US$24.90 in late February before TD said the deal may be delayed by regulators.
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That was compounded by the continuous pressure on regional banks after the failure of Silicon Valley Bank in March. The stock closed at US$15.05 on May 3, 40 per cent below TD’s US$25 offer. It tumbled as much as 40 per cent on May 4 to a low of US$8.99.
Now, with the deals collapsed and merger-arbitrage traders forced to unwind their positions, the focus shifts to how much First Horizon is worth as a standalone company. That’s challenging considering the turmoil swirling around regional banks as PacWest Bancorp and Western Alliance Bancorp lead a renewed slide in US lenders.
Jefferies analyst Casey Haire pegged First Horizon’s fundamental value between US$11 and US$13 per share based on metrics with comparable firms, according to a research note.
The Memphis-based bank looks like it’s in decent shape relative to its peers, at least in isolation, said JonesTrading’s Henderson.
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Scuttled First Horizon deal leaves TD flush with capital and facing big questions about how to use it
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TD Bank and First Horizon call off a US$13.4-billion merger deal
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PacWest stock tanks 60%, Western Alliance 40% as more lenders dragged into banking turmoil
“But given all the turbulence in the sector and the fact that you have to think fundamental investors are not in a buying mood right now, the price recovery could take a while,” he added.
Bloomberg.com