First Niagara Acquires NewAlliance - Analyst Blog - JPMorgan Chase (NYSE:JPM)

Regional bank First Niagara Financial Group Inc. (FNFG) said on Thursday that it will acquire NewAlliance Bancshares Inc. (NAL) in a $1.5 billion cash and stock deal that would boost its presence in New England. This is the largest unassisted deal announcement in U.S. Banking since the financial crisis in mid 2008.

According to Buffalo-based First Niagara, the combined entity would become one of the top 25 banks of the nation, with more than $29 billion in assets which will include more than $14 billion in loans.

The shareholders of NewAlliance will get cash or stock at a ratio of 1.1 shares of First Niagara for each NewAlliance share. Investors can also opt for a combination of stock and cash, the banks said in a statement. Based on the closing price of First Niagara shares on Wednesday, the deal values NewAlliance at $14.09 per share, up 24% from the closing price of NewAlliance shares on the same day.

On the other hand, the deal is priced at 1.63x NewAlliance's tangible book value of $8.62 per share as of June 30, 2010. We think this multiple is reasonable as U.S. banks typically sell in the range of 1.5x–2.0x tangible book (excluding goodwill and intangible assets).

Mergers and acquisitions have been one of the major driving forces at First Niagara. In the past decade it has acquired nine banks. Last year, the company acquired 57 branches from PNC Financial (PNC) as part of PNC's purchase of troubled National City. In April 2010, First Niagara completed the acquisition of Harleysville National Corp. The acquisition of NewAlliance also augurs well going forward for experienced and financially strong First Niagara.

The recent deal, which is expected to close in the second quarter of 2011, will add 88 NewAlliance branches to First Niagara's current network of 255 branches.

The deal is expected to be accretive to First Niagara's earnings in 2011.

During the first full-year ownership in 2012, the acquisition is expected to contribute approximately 4% to 5% of First Niagara's earnings.

However, following the merger announcement, Moody's Investors Service, a division of Moody's Corp. (MCO), placed First Niagara's senior debt rating of "Baa1" under review for possible downgrade. Moody's will consider the challenges related to First Niagara's entry into a new market as well as NewAlliance's credit profile.

First Niagara was advised by Sandler O'Neill + Partners, L.P., while NewAlliance was advised by the investment banking arm of JPMorgan Chase & Co. (JPM).

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NEWALLIANCE BCS (NAL

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