By Rita Trichur and Julie Steinberg
Royal Bank Of Canada on Thursday said it agreed to buy Los
Angeles-based lender City National Corp. in a cash-and-stock deal
worth about $5.4 billion, a move that will significantly deepen
RBC's U.S. wealth-management business with one of the biggest
transactions of its kind since the financial crisis.
Canada's second-largest lender by assets said City National,
which had total assets of $32.6 billion at the end of 2014, offers
long-term earnings growth and a strategic fit with its U.S.
wealth-management and capital-markets businesses.
The deal is the largest announced full-bank acquisition in 3 1/2
years, according to Dealogic. Other big recent deals include
Capital One Financial Corp.'s 2012 acquisition of ING Direct USA
from ING Groep NV for $9 billion and PNC Financial Services Group
Inc.'s 2010 purchase of Cleveland lender National City Corp. for
roughly $5 billion.
M&T Bank Corp. in 2012 announced plans to acquire Paramus,
N.J.-based Hudson City Bancorp Inc. for $3.7 billion, but that deal
has been delayed as M&T works to shore up anti-money-laundering
controls. Last summer, CIT Group Inc. agreed to buyOneWest Bank
NA's parent company for $3.4 billion. That deal is expected to
close in the first half of this year.
For Toronto-based RBC, the deal is the first transformative
wealth-management acquisition since it announced an agreement to
buy London-based BlueBay Asset Management PLC in 2010. The purchase
is also the first under Chief Executive Dave McKay, who took the
helm last August. The move signals RBC's longer-term desire to
expand in the U.S., which it called its second home market.
"You've heard me mention for some time that we want to enhance
our U.S. franchise by adding product capabilities to better serve
our clients," Mr. McKay said on a conference call with analysts.
"City National is the perfect fit."
RBC said it would pay an average of about $47.25 in cash and
offer 0.7489 of an RBC share for each share of City National,
valuing City National shares at about $93.80 each, or a nearly 26%
premium over City National's closing price of $74.57 on Wednesday.
City National was up 18.5% at $88.36 in recent New York trading,
while RBC was off 2.4% to $60.05.
RBC already has a strong U.S. presence, with 8,000 employees, an
investment bank, and wealth-management and asset-management
operations. It said City National will bolster its existing U.S.
business.
City National, which was established in 1954, is known for its
ties to Hollywood. The bank in the early 1960s famously lent money
to Frank Sinatra to pay a ransom to kidnappers who had taken his
son. It has also extended cash-management services to Broadway
productions. The bank over the past several years had embarked on
acquisitions of its own, including Rochdale Investment Management
in 2012 and Sun West Bank in 2010.
Analysts have long awaited another major deal from RBC in wealth
management, which is seen as a key growth platform for the Canadian
bank, especially during a period of slower consumer-loan growth for
its mainstay domestic retail bank. Wealth management provides the
bank with a steady stream of fee income at a time when increasing
numbers of baby boomers seek out such services as they transition
to retirement.
"The acquisition will expand Royal's U.S. presence in both
wealth management, specifically high net worth, and commercial
banking," wrote John Aiken of Barclays Capital in a note to
clients.
"CYN provides geographic exposure to the west coast, with a
strong presence in California as well as operations in New York,
and industry expertise in sectors such as technology and health
care," he added.
Part of City National's allure is its presence in some of the
largest U.S. markets, including Los Angeles, New York and the San
Francisco Bay Area. "In fact, the combined high net worth
population of these three markets is over 4 1/2 times the entire
high net worth population of Canada," RBC's Mr. McKay said.
The deal was two years in the making. Mr. McKay said he first
approached City National Chairman and CEO Russell Goldsmith in 2013
to gauge his interest in a transaction. "That's how it started,"
Mr. McKay said, later adding "initially they weren't for sale."
The two men were introduced by an intermediary and had dinner at
a hotel in Los Angeles that first time, according to a person
familiar with the matter. Full-scale negotiations followed by early
fall 2014, that person said. The original intention was to announce
a deal by the end of last year, but that ended up being delayed by
the due-diligence process.
The deal was code-named "Laker," after the Los Angeles
basketball team, the person said, adding that it represents a first
steppingstone toward a larger U.S. play for RBC.
RBC, which has been actively shopping for wealth-management
deals south of the border, also looked at, but passed on, First
Republic Corp. in San Francisco and another bank in Boston, that
person said.
The City National transaction, which is expected boost RBC's
earnings after two years, should result in about $210 million in
synergies from the combined operations by year five, RBC said.
Late last year, RBC announced other changes to its
wealth-management business, including plans to exit its Wealth
Management International business in the Caribbean. It hired
investment bankers to sell its RBC Suisse operations, The Wall
Street Journal reported earlier this month.
RBC said it would combine its U.S. wealth-management unit with
City National, under the leadership of Mr. Goldsmith. City National
will continue to be based in Los Angeles, RBC said.
Write to Rita Trichur at rita.trichur@wsj.com and Judy McKinnon
at judy.mckinnon@wsj.com
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