By Steve Gelsi
RBC bulks up against its five Canadian rivals by snatching up the Canadian business of HSBC
Royal Bank of Canada unleashed a megadeal on Tuesday to pay C$13.5 billion ($10.1 billion) for the 130-branch Canadian unit of HSBC as it bulks up against its five Canadian rivals.
Royal Bank of Canada (RBC) (RY.T) is paying a price equal to about 9.4 times HSBC Canada's (HSBA.LN) $1.4 billion in estimated 2024 adjusted earnings before interest, taxes, depreciation and amortization, when factoring in cost savings from the deal.
A sizeable business, HSBC Canada employs 4,200 people and handles $134 billion in assets as of Sept. 30. RBC currently employs 92,000 people.
For its part, HSBC said it will book an estimated pre-tax gain of $5.7 billion and that its board will prepare an update on a potential one-time dividend or stock buyback.
"The [HSBC] board will proactively consider opportunities for organic growth and investment, and the appropriate amount of additional surplus capital created as a consequence of this transaction to be returned," the bank said.
Jefferies analyst Joseph Dickerson described the deal as a clear positive for HSBC.
"The related shareholder repatriation may serve to appease those investors still frustrated that [HSBC] dividends were curtailed in early 2020," Dickerson said in a research note.
Shares of HSBC rallied 5% in premarket trades on Tuesday. Royal Bank of Canada fell 1.2% on Monday, prior to the deal announcement.
With Canada's market dominated by six large banks, RBC's deal for HSBC Canada marks a multi-billion-dollar move against its rivals: National Bank of Canada , Bank of Montreal (BMO.T) (BMO), Canadian Imperial Bank of Commerce (CM.T) (CIBC), the Bank of Nova Scotia (BNS.T) (Scotiabank), and Toronto Dominion Bank (TD.T) (TD).
Among other major M&A moves from Canada's big six, TD said in February it would buy Memphis-based First Horizon for $13.4 billion in its biggest-ever acquisition. It's also buying U.S.-based Cowen Inc. (COWN) for $1.3 billion.
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RBC said the deal for HSBC Canada is expected to close by late 2023. The acquisition is expected to add 6% to RBC's earnings per share, relative to analyst estimates for its 2024 earnings, the bank said.
RBC CEO Dave McKay said the acquisition of HSBC Canada "will add a complementary business and client base in the market we know best."
The addition of HSBC Canada's international client base "will help us better serve global clients looking to invest and grow in Canada," McKay said.
HSBC said a strategic review of HSBC Canada weighed the business unit's relatively low market share against opportunities in other markets and decided the best course would be selling the business to unlock value.
HSBC Group CEO Noel Quinn said HSBC Canada "is a high performing and profitable bank" but the decision to sell was based on a "thorough review of the business, which assessed its relative market position within the Canadian market and its strategic fit within the HSBC portfolio."
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(END) Dow Jones Newswires
11-29-22 0827ETCopyright (c) 2022 Dow Jones & Company, Inc.