Laurentian shares slide as leading buyout contenders decline to make offers

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Laurentian Bank of Canada’s share price slumped as a dwindling pool of takeover suitors prompted analysts to lower their expectations for a sale.

Laurentian’s stock price dropped 6 per cent on Friday after The Globe and Mail reported that Bank of Nova Scotia and Toronto-Dominion Bank have decided not to submit bids as the timeline to make offers nears its month-end deadline, according to sources familiar with the matter.

TD and Scotiabank were considered top contenders to scoop up Laurentian, and their decisions to bow out lower the probability of a sale by 50 per cent, according to Barclays analyst John Aiken.

“We believe this reduces the likelihood of a sale of [Laurentian], as we do not view the remaining ‘Big 6′ banks as compelling or as motivated, in comparison,” Mr. Aiken said in a note to clients.

TD is sitting on the largest pile of excess capital among its peers after it cancelled its $13.5-billion deal for Tennessee-based First Horizon Corp. With TD’s sights set on expanding its U.S. operations, the lender could have been interested in Laurentian’s U.S. commercial financing unit, Northpoint Commercial Finance, which has been the bank’s fastest growing division.

Scotiabank, which has yet to reveal its strategic “refresh” led by newly minted chief executive officer Scott Thomson, has pegged Quebec and British Columbia as key markets to grow its businesses, especially in commercial banking, which is a focus for Laurentian.

“We believed TD (with its excess capital) and Scotia (desire to expand in the Quebec market) were two of the more compelling and motivated bidders for LB,” Mr. Aiken said. He added that “should a buyer of Laurentian eventually emerge” with the list shrinking, “the chances of a bidding war for [Laurentian] and driving a bid above book value, would likely diminish.”

Laurentian’s share price has languished over the past year as weaker-than-expected earnings and the failure of California’s Silicon Valley Bank and other regional U.S. lenders weighed on its valuation. The stock has hovered near $30 a share, less than 60 per cent of its book value.

Its shares spiked to more than $40 in mid-July after the bank confirmed it was conducting a strategic review.

Even though Laurentian’s stock jumped about 30 per cent, it still remained below the book value per share of about $59, “suggesting to us that the market, too, lacks the conviction that a premium bid will emerge,” Mr. Aiken said.

The bank is at the halfway point of its three-year strategic turnaround plan, which focuses on certain specializations, including commercial equipment financing and partnering with external companies to revamp its digital banking services.

Laurentian engaged JP Morgan Chase & Co. in late spring of last year to advise the bank on potential growth opportunities. JP Morgan was tasked with exploring potential acquisitions that could bolster Laurentian’s retail, commercial and technology platforms, as well as possible mergers with mid-sized financial services rivals.

While an acquirer could still emerge, the loss of two major contenders prompts questions around what Laurentian’s next move should be if it does not receive any bids or if the review does not lead to a sale.

“We wonder if the efforts to explore potential growth options implies that, to a certain degree, management may not believe that the current strategy will be able to deliver the results that could propel Laurentian’s valuation,” Mr. Aiken said.