PBCT Buys Financial Federal

People’s United Financial, Inc. (PBCT: 15.50 0.00 0.00%) recently announced that it has completed the acquisition of Financial Federal Corp. for $738 million, comprising both cash and stock. The acquisition has increased the assets of the company to over $22 billion.
 
Accordingly, Financial Federal shareholders are receiving $11.27 in cash and one share of People’s United common stock. Based on the closing price of People’s United on Nov 20, 2009, the last business day before the deal was announced, the transaction is valued at $27.74 per Financial Federal share.
 
People’s United expects the transaction to be significantly accretive to operating earnings in 2010 and have an IRR greater than 20%. Given Financial Federal’s significant excess capital, the transaction is expected to have a slight positive impact on People’s United’s industry leading capital levels on an operating basis.
 
Financial Federal is a leader in equipment financing and provides a valuable complement to People’s United’s existing business lines, particularly, People’s Capital and Leasing (PCLC), its equipment financing subsidiary. Furthermore, this transaction generates meaningful earnings accretion without diluting the capital ratios, which will provide tremendous strategic flexibility in the current volatile markets.
 
People’s United reported fourth quarter operating earnings per share of 8 cents, which was flat with the Zacks Consensus Estimate and third-quarter earnings. However, earnings declined from 10 cents in the prior-year quarter due to continued market pressure, which further drove non-interest expenses higher and interest income lower for the reported quarter.
 
Overall, People’s United is desperately trying to overcome the challenging economic environment through opportunistic acquisitions, stable net interest margin, modest loan growth and lower net loan charge-offs.
 
However, the company’s operating leverage and balance sheet remains sensitive to weak credit quality, increasing loan loss provisions, non-interest expenses against decreasing interest income. We believe the historically low interest rate environment is expected to have a negative impact on People’s United for some more time before it rebounds with the slowly recovering economy.
 
On Friday, the shares of People’s United closed at $15.80, up 1.5%, at the New York Stock Exchange.