Canadian giants plan a 'merger of equals' Deal would be 1st test of law that restricts such consolidations


January 24, 1998|By BLOOMBERG NEWS

TORONTO -- Royal Bank of Canada said yesterday that it will acquire the Bank of Montreal for stock valued at $17.69 billion in Canadian dollars -- $12.16 billion U.S. -- stunning a clubby banking community that has been shielded from the wave of mergers sweeping the world financial industry.

Combining Canada's biggest and third-biggest banking companies would create a financial institution with assets of C $453 billion, ranking it third in North America behind Chase Manhattan Corp. and Citicorp.

It's the first test of a 30-year-old law that restricts mergers among Canada's six major banks. The agreement sent shares of other Canadian banks -- including No. 2 Canadian Imperial Bank of Commerce and No. 4 Bank of Nova Scotia -- higher on speculation that further consolidation lies ahead.

"North America has been dominated by the big American banks, and now people will have to sit up and take notice," said Catherine Garrett-Cox, an investment manager at London-based Hill Samuel Asset Management, which runs about $56 billion in assets. "This will get people's attention back into Canada, and people will have to take this new bank seriously."

The companies called the transaction a "merger of equals." Shareholders of both banks will swap their stock for shares in a new company, and Bank of Montreal holders will receive shares valued at 22 percent more than the closing price yesterday.

The purchase would require Canadian regulators to lift rules preventing the country's big banks from merging.

Finance Minister Paul Martin said the government "isn't prepared to allow such a fundamental change in the structure of the financial sector" until after a task force on bank mergers, appointed in 1996, issues a report in September. Martin and his officials were obviously annoyed that the banks hadn't talked to the government before making the announcement.

Royal Bank and Bank of Montreal are reacting to pressures caused by consolidation in financial services. Banks in the United States, Europe and Japan have joined forces this decade to better compete in a world where size matters most. Canada's banks, once among the world's largest, have pressed the federal government to pass legislation that would let them overcome restrictive ownership limits.

The proposed merger is the world's seventh-largest transaction in the financial-services industry this decade, according to Securities Data Co.

The largest was the $33.8 billion takeover of Bank of Tokyo Ltd. by Mitsubishi Bank Ltd. in 1996.

Royal Bank has assets of $244.8 billion Canadian and owns 73.4 percent of the country's largest brokerage firm, RBC Dominion Securities Inc. Bank of Montreal owns Chicago-based Harris Bankcorp Inc. and the Toronto brokerage Nesbitt Burns Inc.

Structuring the transaction as a pooling of interests will let the companies avoid huge goodwill charges for years to come. The new bank, as yet unnamed, will take an estimated C$1 billion charge to restructure this year, Royal Bank's Chairman and Chief Executive John Cleghorn told analysts.

They expect to complete the transaction by Oct. 31.

Cleghorn said they aim to achieve cost savings of 10 percent over the first three to five years.

The bank won't be able to repurchase shares for at least a year.

Pub Date: 1/24/98

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