Wilmington Trust sold cheap to Buffett's M&T: Updates

M&T (Manufacturers & Traders) bank, the Buffalo, NY, lender used by investor Warren Buffett to roll up a string of underperforming banks, says it's buying troubled Wilmington Trust Corp., the biggest commercial bank ($10 billion/assets) remaining in the Philadelphia Federal Reserve district, for stock worth just $3.84 a share, half Wilmington's recent trading price and a 25-year low. Announcement here.

The sale follows six quarters of losses, including a fat third-quarter writedown of counstruction loans, announced today. "M&T's offer for Wilmington Trust is the company's best option," wrote Janney Capital Markets analyst Stephen M. Moss, a persistent critic of the bank's past financial management, in a report to clients today. "We doubt another buyer will emerge, given the depth of the company's problems."

The sale means job cuts are pending at Wilmington Trust's Rodney Square headquarters. "Expect all the overhead to disappear. M&T is a very cost-efficient bank," said Robert Costello, head of Costello Asset Management of Huntingdon Valley. "Look at how much they lost with all that development on farmland down (Delaware Route) 1," he added. "The shareholders took a bath because of the management of this bank."

It's "sad to lose an institution that we have known and trusted for over a century in the City of Wilmington," city Mayor James Baker said in a statement. Baker plans to meet with M&T officials and remind them the city and state do a lot of business with the bank, in hopes of cushioning the blow and maybe attracting new M&T operations. Wilmington Trust employs around 2,700, mostly in Delaware.

Wilmington has been battered by longterm job cuts at DuPont Co., the shutdown of nearby General Motors, Chrysler and Valero plants over the past two years, and the loss of more than 3,000 Delaware bank jobs at the former MBNA Corp., the credit card bank that's been shrinking under current owner Bank of America Corp.

CEO Don Foley, an ex-ITT executive who became boss after predecessor Ted Cecala left when loan losses mounted last Spring, will join M&T's board. Deal to close next year, pending shareholder and regulatory approvals.

M&T's deal would give it control over Wilmington Trust's 48 branches, mostly in Delaware, which will be renamed with the M&T brand. There's little if any overlap with M&T's 742 offices, mostly in New York State, eastern and central Pennsylvania (including the former Frankford Trust in the Philadelphia area), and the Washington-Baltimore area. Wilmington Trust's nationwide and European tax-shelter and investment businesses will keep the Wilmington brand.

The deal follows Wilmington's admission of massive third-quarter losses; M&T expects to write off $1 billion, or one-eighth, of Wilmington's loans, particularly bad construction loans secured by property whose value has plunged. Wilmington owes the federal TARP bailout program $330 million, which M&T will eventually pay. Wilmington's sale price, around $350 million, is less than the current value of (much smaller) WSFS Corp., which will replace Wilmington Trust as Delaware's biggest independent bank.

"I'm really surprised that the drop in loan quality occurred so quickly," says David R. Hargrove, partner in Tucker Hargrove Management Inc., who sold his previous firm to Wilmington Trust in 1990. "It's a good deal for M&T. They have the capital to work through the real estate losses, and can probably get better returns" from Wilmington Trust's tax shelters and asset management units.

Writes Janney Capital Markets analyst Rick Weiss, "We like the deal" at a low price (which will keep M&T from having to chop Wilmington staff and assets too deep.)

"Wilmington Trust has not realized its true earnings potential for at least the past decade and would have performed better under a more energetic management team," which it may finally get under Wilmers, Weiss adds.

M&T chief executive Robert Wilmers may be energetic, but he's also 76, and M&T has been rumored in merger talks with bigger banks, so Wilmington could end up getting sold with its new owner. That could help its shareholders, led by Baltimore-based T. Rowe Price investment funds, recoup some of their steep losses.

"Our concerns regarding the asset quality and extensive problems at Wilmington Trust are alleviated by M&T's impressive track record regarding acquisitions, including some difficult ones such as Provident Bancshares and Allfirst Financial," Weiss added. Still, "we do not expect the workout problems to be quick or easy, particularly given the weak real estate market."