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Investors of TD Bank (TSX:TD) took a huge sigh of relief late last week, as the Big Six bank said no to the First Horizons Bank (NYSE:FHN) deal. Undoubtedly, Chief Executive Officer Bharat Masrani was keen on the deal at the time. Still, it’s hard to ignore the regional banking crisis that’s been going on south of the border. Masrani is a brilliant manager who’s known to be very prudent. Though it may have been painful to call off the deal, it was the right call, and I think the man should be applauded for how he moved forward with what could have been a very sticky situation.
Undoubtedly, TD Bank has been hungry for a U.S.-based acquisition for quite some time. And with all the regulatory hurdles, it may prove hard to get a deal done. Regardless, it’s always wise to reconsider a pending deal whenever there’s a crisis. Nobody wants to introduce recently unearthed risks aboard while running the risk of overpaying.
First Horizons stock collapses after TD Bank walks
For the most part, it seems like TD Bank (mostly) dodged a bullet. Though TD will be penalized for the deal falling through, I think any such fees are peanuts for the $152 billion banking behemoth. Further, it’s far better to pay a relatively small fee than overpay for a bank that may have a bit of baggage.
Following TD’s failed merger, shares of First Horizons collapsed by around 40%. Even after Friday’s regional banking relief rally, FHN stock is off around 56% from its 52-week high just shy of US$25 per share. At around US$6.3 billion, TD’s original US$13.4 billion now makes no sense.
Looking ahead, it’s hard to say whether TD Bank will go bargain-hunting anytime soon. Some may argue TD’s credibility took a hit after walking away through the eyes of U.S. banks and regulators.
Personally, I think walking away is more than forgivable. I don’t think it makes a lot of sense to follow through with a deal that could hurt shareholder value or introduce new risks that haven’t yet been carefully thought through.
Further, TD has shown it will do what it believes is best for its stakeholders, regardless of what others may think. I think its reputation may actually get a nice boost at the end of the day. I believe that managers who make the unpopular (but likely correct) choice, potentially at the expense of their own reputations, deserve respect.
For now, it seems like TD Bank has a lot of liquidity to put to work. Share buybacks and dividend increases may be the way to go — at least for now.
TD Bank stock: Bottom line
At the end of the day, it’s management that had the final say about the deal. They answered the many calls of investors to walk away, and it’s many of these investors will likely be sticking around through this rough patch. Only time will tell if TD is able to put its liquidity to good use as the banking crisis unfolds down south. Regardless, I think TD stock looks incredibly undervalued here now that the First Horizons deal is off the table.
After the First Horizons deal fell through, TD stock didn’t really surge. Though shares were spared from a big down day for broader markets and the banking sector. On the following day, TD rose 2%, slightly higher than the TSX Index, which was up 1.5%. I think TD stock has room to run from here.
At 10.07 times trailing price to earnings, I view TD stock as the cheapest of the Big Six.
