First Union To Acquire Corestates In $16.6 Bn Deal

First Union Corp and CoreStates Financial Corp said on Tuesday they agreed to a $16.6 billion merger, the largest in US banking history. Under terms of the definitive agreement announced after the stock market close, CoreStates stockholders will receive $83.84 in First Union stock for each CoreStates share.

First Union, the acquirer, said the deal will add to its earnings within 18 months although it said the calculation excludes after-tax merger-related restructuring charges of about $795 million. Wall Street analysts said the deal, which was rumored in the stock market before the official announcement, would be controversial because CoreStates recently turned down an offer of $88 per share from Pittsburgh-based Mellon Bank Corp.

 

A spokesman for Mellon declined comment on the First Union-CoreStates merger news. Wall Street sources said Mellon was unlikely to come back with a rival bid. They said lockup provisions in which Core States and First Union each granted the other options to buy stock would make it prohibitively expensive for an outsider to get involved.

The companies said the merger values were based on First Unions closing stock price of $51.75 per share on Friday. First Unions stock had risen $0.6875 to $52.4375 on Monday but declined to $50.25 on Tuesday before trading was halted on the New York Stock Exchange as the rumors began to sweep the markets.

CoreStates stock rocketed $6.50 higher to $79 per share on Tuesday. The announcement said Philadelphia will become a regional headquarters for the five northernmost states in First Unions banking empire which stretches from Connecticut to Florida. Also, the headquarters for the corporate banking functions for the merged company and a major center for customer service operations will be located in Philadelphia. The companies said the moves will bring 3,000 new jobs to the Philadelphia area which will significantly offset merger-related job reductions.

Analysts had said a merger of First Union and CoreStates would result in substantial layoffs in New Jersey and Pennsylvania. Analysts also said the merger was expensive based on the multiple of more than five times CoreStatess book value that First Union is paying.

But based on the multiple of a little over 20 times current year earnings, Robert Bonelli of broker Ernst & Co said the deal was in a range with others that have been announced this year. SNL Securities, a Charlottesville, Va,-based research firm, ranked the deal as the biggest ever in US banking history. NationsBank Corps still pending acquisition of Barnett Banks Inc ranks as the second biggest deal with a price tag of $15.5 billion.

First Union and CoreStates combined will have the largest share of retail deposits on the East Coast, including the top market share in New Jersey and Pennsylvania, and the leading share in the city of Philadelphia. With 2,766 offices serving 16 million customers, it will be the nations sixth largest banking company with $204 billion in assets. As of September 30, 1997, CoreStates had assets of $47.6 billion and First Union had assets of $143.9 billion.

The acquisitive First Union is also in the process of acquiring Richmond, Va.-based Signet Banking Corp. The combined company will have the first, second or third largest share of deposits in 21 of the 30 largest metropolitan areas on the East coast of the United States.

While this merger is important strategically, it also meets our financial performance criteria by being cumulatively accretive within 18 months, Edward Crutchfield, chairman and chief executive officer of First Union, said in a statement.

The transaction will use the pooling of interest accounting method, the companies said.

We are particularly pleased that First Union is demonstrating an unwavering commitment to the growth and vitality of the region CoreStates serves, CoreStates chairman and chief executive Terrence Larsen said in a statement.

CoreStates would only consider a merger that clearly enhanced our ability to create superior long-term value for our customers, shareholders, employees and the communities we serve.

First Union will also establish a $16 million Employee Training and Development Fund to assist any displaced employees by providing training for positions within First Union or other area companies.

The companies said that following the merger, an Office of the Chairman will include Crutchfield as chairman and chief executive officer, Larsen as vice chairman and First Unions John Georgius as president.

Six members of the CoreStates board of directors will join the First Union board.

Analysts said after the talks between Mellon and CoreStates broke off that a sticking point was the unwillingness or Mellon chairman and chief executive Frank Cahouet to agree that Larsen would be his replacement when he retires at the end of 1998.

First Union and CoreStates said Larsen will have direct leadership responsibilities for the combined companys corporate banking functions which include specialized industry lending, large corporate lending, and capital markets businesses.

The merger, which will be accounted for as a pooling of interests, is expected to be consummated by April 30, 1998, pending CoreStates and First Union shareholder approval and regulatory approval.

The companies said that in the definitive merger agreement CoreStates granted First Union an option to purchase, under certain circumstances, up to 19.9 percent of CoreStates outstanding shares of common stock.

In addition, First Union granted CoreStates an option to purchase, under certain circumstances, up to 9.9 percent of First Unions outstanding shares of common stock. Such provisions in a merger agreement are designed to discourage rival suitors from mounting a competing bid.

The announcement said First Union and CoreStates combined will have the largest share of retail deposits on the East Coast, including the top market share in New Jersey and Pennsylvania, and the leading share in the city of Philadelphia.

With 2,766 offices serving 16 million customers, it will be the nations sixth largest banking company with $204 billion in assets. As of September 30, 1997, CoreStates had assets of $47.6 billion and First Union had assets of $143.9 billion.

First Union and CoreStates said Larsen will have direct leadership responsibilities for the combined companys corporate banking functions which include specialized industry lending, large corporate lending, and capital markets businesses.