Toronto-Dominion Bank and First Horizon Corp. have agreed to terminate their merger agreement, the companies said on May 4.

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TD Bank and First Horizon call off US$13.4-billion merger deal Back to video

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The deal, which valued First Horizon at US$13.4 billion when it was announced in February 2022, was called off because the banks did not have clarity on if and when they would get the necessary regulatory approvals, TD said in a statement.

As part of the termination agreement, TD will pay US$200 million to First Horizon, on top of a US$25 million reimbursement fee.

The merger would have made TD the sixth-largest bank in the U.S. by assets. The transaction hit the first signs of trouble this February when TD warned First Horizon that it might not be able to secure the blessing of regulators by the extended deadline of May 27.

The deal hit another snag after the collapse of Silicon Valley Bank sent shockwaves through the U.S. banking system, in which TD already had a significant footprint, including a 12 per cent stake in The Charles Schwab Corp. The U.S. banking turmoil raised doubts that the deal would go ahead at its original US$25 per share offer. First Horizon’s stock price fell more than 30 per cent between the announcement of the deal and late March. The Memphis-based bank’s stock plunged again on May 4, with shares down more than 35 per cent to US$9.50 in late morning trading in New York.

But TD appeared to remain committed to the deal. When asked if he was still interested in buying First Horizon at TD’s annual shareholder meeting on April 20, TD chief executive Bharat Masrani had said: “We see the benefits of the merger.” He offered few other details about the state of the transaction.

“This decision provides our colleagues and shareholders with clarity,” Masrani said in the statement on May 4. “Though disappointed with the outcome, we move forward with a strong, growing franchise in the United States, servicing more than ten million customers across our footprint.”

First Horizon chief executive Bryan Jordan said the announcement was “unfortunate and unexpected,” but that his bank would “continue on its growth path operating from a position of strength and stability.”

During the investor call later in the morning, Jordan emphasized that the fact regulatory approvals weren’t obtainable within the May 27 timeline wasn’t related to First Horizon in any way.

“We were informed by TD that they could not provide an updated timeline for an extension and they could not provide assurance of regulatory approval in 2023 or 2024,” he told shareholders. “Let me assure you, we pursued every possible path to complete this transaction without success. At no time, did we discuss any changes in price or any other changes to the structure of the deal.”

John Aiken, senior analyst and head of research at Barclays Bank PLC, said the original deal price no longer made sense, but he expressed surprise that the parties scrapped the deal entirely.

We ... believe that there could be broader repercussions from walking away from the deal

John Aiken, senior analyst, Barclays

“We are surprised that the parties could not come to an agreed upon lower price and believe that there could be broader repercussions from walking away from the deal,” Aiken wrote in a note to clients May 4. “This includes the possibility that this could affect the willingness of potential partners to sit across the table from TD in the future, with future deployment of excess capital a question mark moving forward.”

Scotiabank analyst Meny Grauman also flagged the strategic implications for TD, which he calculated now has a “peer leading” CET1 ratio of 14.9 per cent, taking into account the break penalties and TD’s acquisition of Cowen Inc. in March.

“The market needs to realize that there is a very complicated reappraisal of TD’s overall growth strategy that needs to come on the other side of this,” Grauman wrote in a note to clients.

National Bank of Canada analyst Gabriel Dechaine said the termination was a good thing for TD shareholders.

“We do not believe most investors were supportive of the transaction,” Dechaine wrote May 4, noting shareholders had become more apprehensive in the wake of the U.S. regional banking turmoil.

“Eliminating the FHN acquisition from our model results in lower 2024E EPS. However, we believe the market will reward TD with a higher valuation multiple, if only to reflect the bank’s suddenly more defensive capital position,” Dechaine said.

TD shares were trading down less than half a per cent at $81.17 in late morning trading in Toronto.

• Email: shughes@postmedia.com | Twitter: StephHughes95