Royal buys U.S. bank Centura

Royal Bank of Canada will add a missing piece to its North American expansion strategy with a $2.3-billion (U.S.) deal to acquire a mid-sized regional U.S. bank.

Royal said yesterday that it has signed a definitive agreement to acquire Centura Banks Inc., the 14th-largest bank in the southeastern United States with assets of $11.5-billion, 3,600 employees and operations in North Carolina, South Carolina and Virginia.

The purchase, to be done by way of a share exchange, provides Canada's largest bank with a platform to expand its retail banking operations in the United States, Royal Bank chairman John Cleghorn said.

"We have to grow on a North American basis, and build ourselves into a stronger North American financial institution," he told reporters during a conference call yesterday.

Mr. Cleghorn described the acquisition of the Rocky Mount, N.C.-based bank as an "outstanding opportunity" that provides Royal with a "strong foothold" in the high-growth southeastern U.S. market, a region where the bank is concentrating its growth efforts.

He also said Royal plans to continue building its presence in the United States. "Now that we have a bank, we can expand to other parts of the United States and centralize operations," Mr. Cleghorn told analysts yesterday in a separate conference call.

The agreement with Centura caps a string of U.S. purchases by Royal. While it ranks as the largest foreign acquisition ever by a major domestic bank in terms of value, it is in keeping with Royal's strategy of doing manageable deals instead of blockbusters.

Over the past year alone, Royal has spent about $4.5-billion on a shopping spree in the United States, with each successive deal larger than the preceding one.

Last March, the bank snapped up Prism Financial Corp., a Chicago-based mortgage broker, for $115-million. It acquired two insurance subsidiaries of Greenville, S.C.-based Liberty Corp. for $580-million in June, and Dain Rauscher Corp., a Minneapolis, Minn.-based mid-sized brokerage firm, for $1.5-billion in September.

Mr. Cleghorn told analysts he would like the number of stock brokers Royal has in the United States to climb to about 4,000 from the current level of 2,500 at Dain Rauscher. That would mean "making two or three acquisitions over time, but nothing's on the drawing board today."

Under Mr. Cleghorn's leadership, Royal began turning its sights south of the border in 1999, after the federal government rejected the bank's proposed merger with rival Bank of Montreal. The controversial merger plans among four of the country's big banks were blocked after they ran into stiff opposition from the public.

But yesterday, Mr. Cleghorn did not rule out further expansion in Canada. The passage of new financial services legislation this year could open the door to bank mergers. "Regardless of what we are doing in the U.S., we want to keep our options open. We want to keep our powder dry north of the border," he said.

In the United States, Centura represents Royal's first move into retail banking, Mr. Cleghorn said. Centura has 241 retail branches and 650,000 customers.

Mr. Cleghorn said that Centura's three main businesses -- personal and commercial banking, wealth management, and insurance -- "dovetail nicely" with Royal's existing U.S. operations.

The key will be making all the pieces fit together by cross selling -- marketing one company's products and services to customers at another company, a task that bank officials conceded will not be easy.

"It is difficult to do, but it is worth pursuing as difficult as it is," James Rager, Royal's vice-chairman of personal and commercial banking, told reporters.

He said the acquisition will also result in cost savings of $70-million over three years for Royal, because it will be able to integrate many of Centura's operations with mortgage broker Prism, and with Security First Network Bank, Royal's small, Atlanta-based Internet bank.

Under the deal, each Centura share will be converted into 1.684 shares of Royal Bank. The transaction is valued at $3.5-billion (Canadian), based on the $51.80 closing price of Royal's shares on the Toronto Stock Exchange on Jan. 25. Royal is paying 2.4 times Centura's book value.

Royal's shares closed at $49.25 each yesterday on the TSE, down $2.55. The purchase price is equal to about 10 per cent of Royal's total market capitalization.

The deal is subject to approval by Centura's shareholders as well as regulators in the United States and Canada. It is set to close July 31.

Southern exposure

Recent Canadian bank acquisitions in the U.S. market

Price
Bank
Target
Year
$million (U.S.)
Royal Bank              Centura                  2001     $2,300
                        Dain Rauscher            2000      1,500
                        Liberty Life             2000        580
                        Prism Financial          2000        115
                        Security First           1998         13
Bank of Montreal        Various wealth managers  2000        165
                        Harris Bank              1985        547
Toronto Dominion Bank   Jack White               1998        100
                        Kennedy Cabot            1997        141
                        Waterhouse               1997        480
CIBC                    Oppenheimer              1997        525

Source: Globe and Mail