In a significant turn of events, recently
Hilltop Holdings Inc.
(
HTH
) announced its plan to purchase US-based financial services
company PlainsCapital Corp. for about $536.9 million.
While the deal awaits the approval from the board of both the
companies, the transaction is expected to culminate by the end of
this year. Accordingly, total cash of $318 million along with 27.5
million Hilltop shares will be disbursed to PlainsCapital upon
successful completion of the buyout.
Additionally, each share of PlainsCapital will be valued at a
cash of $9 and 0.776 shares of Hilltop. Based on Hilltop's closing
price on May 8 of $7.96, the total value stands at $15.18 per
PlainsCapital share, thereby summing up to $536.9 million.
Headquartered in Dallas, US, PlainsCapital operates through its
subsidiaries -PlainsCapital Bank, PrimeLending, and FirstSouthwest,
all of which will be acquired by Hilltop as per the purchase
agreement. Consequently, PlainsCapital will become one of the
subsidiaries of Hilltop.
Further, Hilltop took the financial advice from Stephen Inc. and
legal advice from Wachtell, Lipton, Rosen & Katz. On the other
hand, PlainsCapital appointed JPMorgan Securities LLC of
JP Morgan Chase & Co.
(
JPM
) as its financial advisor and Sullivan & Cromwell acted as its
legal advisor.
Our Take
We believe that the acquisition complements Hilltop's inorganic
growth strategy very well. Armed with total cash and investments of
about $799 million as of March 31, 2012, Hilltop's balance sheet
also remains sufficiently liquid and risk-free to accommodate the
purchase.
Moreover, the company had about $528 million in available cash
and cash equivalents, at the end of the first quarter of 2012,
particularly to fund opportunistic and effective mergers and
acquisitions.The statutory surplus and risk-based capital of
Hilltop and its subsidiaries exceed the minimum regulatory
requirements.
Based on the closing price on May 8, Hilltop had a market
capitalization of about $454 million. These aspects further
validate Hilltop's expansion strengths.
Additionally, the proposed acquisition of PlainsCapital
underscores Hilltop's plan to gain from the economies of scale.
While Hilltop itself has been taking up effective distribution
initiatives across Texas, Oklahoma, Georgia, Tennessee and Arizona,
the addition of PlainsCapital will further fortify its market
position in these areas.
The Texas-based PlainsCapital operates in 40 locations with over
3,400 employees. Hence, the acquisition should help Hilltop enhance
its market share, while also supporting its long-term growth
strategy.
Earnings Review
Last week, Hilltop reported its first-quarter 2012 net income of
$0.3 million or 1 cent per share against $1.4 million or 2 cents
per share in the year-ago period. Earnings also lagged the Zacks
Consensus Estimate of 4 cents per share.
Results reflected higher premiums and investment income along
with improved net realized gains that drove the top line. However,
this growth was substantially offset by higher-than-expected
expenses, which in turn hampered the combined ratio and resulted in
operating cash outflow and underwriting loss in the reported
quarter.
Going ahead, we believe Hilltop's ongoing business generation
initiatives and sustaining a fair capital position should aid the
company to benefit from the opportunities that the markets provide
on stabilization. However, management requires proactive steps to
manage its expense growth as well, in order to maintain its
operating and competitive leverage. Hilltops carries a Zacks Rank
#3, translating into short term strong Hold rating.
HILLTOP HLDGS (HTH): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
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