Bloomberg News

CIT Group Takeover Speculation Revives After Fed Lifts Curbs (1)

June 03, 2013

CIT Group Chief Executive Officer John Thain

As CIT Group’s chief executive officer, John Thain has worked to bring down the cost of funds from as high as 13 percent in the aftermath of the firm’s money-losing foray into subprime mortgages. Photographer: Jonathan Fickies/Bloomberg

CIT Group Inc. (CIT:US), the once-bankrupt business lender run by John Thain, may have become a more attractive takeover target after escaping crisis-era regulatory curbs.

Speculation about CIT’s future revived on May 30 when the Federal Reserve Bank of New York lifted sanctions that had restricted dividends, buybacks, severance payments and hiring since 2009. The new freedom and Thain’s turnaround of New York-based CIT’s fortunes (CIT:US) since his 2010 arrival make the lender a good fit for a healthy bank with cheaper funding, analysts said.

“Now the company will be able to make its own decisions,” said Mark Palmer, a New York-based analyst at BTIG LLC, which provides trading and services for hedge funds and institutional investors. “The potential acquisition of CIT is a cleaner proposition for a potential buyer than it had been.”

Thain, 58, sold the previous company he led, Merrill Lynch & Co., to Bank of America Corp. amid the 2008-2009 credit crisis. As CIT’s chief executive officer, he’s worked to bring down the cost of funds (CIT:US) from as high as 13 percent in the aftermath of the firm’s money-losing foray into subprime mortgages.

A Canadian lender such as Toronto-Dominion Bank could profit by using low-cost deposits to fund CIT’s high-yielding commercial loans, Palmer said. Analysts including Bert Ely at Ely & Co. have said CIT could be a good match with San Francisco-based Wells Fargo & Co. (WFC:US), given the bank’s involvement in similar markets such as factoring and small-business lending. Factoring involves buying receivables at a discount from manufacturers to provide them with cash.

Stock Reaction

Curt Ritter, a CIT spokesman, and Toronto-Dominion’s Duncan Martin said their firms don’t comment on rumor or speculation. “We remain focused providing financing and services to our clients, prudently growing our franchise and improving long-term shareholder value,” Ritter said. Officials at Wells Fargo, the nation’s No. 1 small-business lender, didn’t immediately respond to inquiries about CIT.

CIT’s stock (CIT:US) rose as much as 7.4 percent on May 30 to its best level since February 2011 when it announced the end of the written agreement signed with the New York Fed on Aug. 12, 2009. Hours later, CIT said it would buy back as much as $200 million of its shares. The stock closed at $46.08 last week for a 12-month gain of 35 percent.

The firm has a market value of about $9.3 billion and the stock sells for little more than book value, a theoretical measure of what a company would be worth if liquidated. Founded in 1908, CIT employed more than 3,500 people at the end of 2012 serving customers in more than 30 industries.

Top Goal

Thain made lifting the Fed agreement a top priority since being named CEO in February 2010. He was brought in after the firm, led by former CEO Jeffrey Peek, had taken $2.33 billion in U.S. bailout money and then reorganized in bankruptcy court.

Losses piled up amid defaults on home and consumer loans, and unpaid debts from students left stranded when a helicopter pilot school went bankrupt. The taxpayer funds were never repaid, and the firm was still subject to extra scrutiny from federal regulators.

Ending the added supervision allows CIT to set aside less money to cover bad loans, and it doesn’t need permission to prepay debt, hire senior executives or offer them large severance packages.

“They have got to be popping a champagne cork,” said Jeff Davis, managing director of the financial institutions group of Mercer Capital, a Memphis, Tennessee, advisory firm. “A buyer certainly wouldn’t want to assume the written agreement.”

More Hurdles

Standard & Poor’s said May 31 that terminating the Fed’s agreement removes an obstacle to an upgrade of CIT’s credit rating (CIT:US), which could happen if the firm hits certain financial targets without substantially relaxing its loan standards.

The regulatory agreement wasn’t the only hurdle to a takeover, Davis said. The Federal Reserve has been reluctant to bless large bank transactions, as evidenced by the delay of M&T Bank Corp. (MTB:US)’s pending takeover of Hudson City Bancorp, he said. CIT also has businesses that regulators do not want banks to fund with deposits, such as aircraft leasing.

If CIT doesn’t sell in the near-term, he said, it now has more flexibility to buy loan portfolios and other assets.

“They have got a much bigger fairway to work with now,” Davis said.

Under Thain’s watch, the $44.6 billion-asset company has curbed loan losses, and improved its funding costs by retiring debt and increasing deposits. CIT earned (CIT:US) $162.6 million during the three months ended March 31 compared with a loss of $427 million a year earlier.

Sale Prospects

Investors have speculated that a sale might be Thain’s ultimate goal. He came to CIT after persuading Bank of America to pay $29 a share for Merrill Lynch, a 70 percent premium to its stock price, even as credit markets and rival firms were collapsing in 2008. The bank ousted Thain early in 2009 amid disputes over bonuses and whether Merrill Lynch’s spiraling losses had been properly disclosed.

While CIT probably won’t decide to sell in three months, there is a strong possibility that it will happen eventually, said Mike Turner, an analyst with Compass Point Research and Trading LLC in Washington who rates the stock neutral.

“It has a bunch of good businesses that everybody wants to be in,” he said. “And they have market-leading positions in all of them.”

To contact the reporter on this story: Matthew Monks in New York at mmonks1@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net; Jeffrey McCracken at jmccracken3@bloomberg.net


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Companies Mentioned

  • CIT
    (CIT Group Inc)
    • $46.46 USD
    • -0.80
    • -1.72%
  • WFC
    (Wells Fargo & Co)
    • $52.9 USD
    • -0.46
    • -0.87%
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