Four banks, including KeyCorp, vied to acquire First Niagara Financial Group, before the Buffalo-based bank struck its deal with KeyCorp.
New details about what led up to Cleveland-based KeyCorp.’s $4.1 billion deal for Buffalo-based First Niagara emerged in documents KeyCorp filed with the Securities and Exchange Commission. As the bidding process unfolded and the field of candidates narrowed, one other rival bank remained in the hunt until just days before KeyCorp and First Niagara made their deal. None of the other three bidders was named.
The documents reveal First Niagara’s board of directors began exploring a sale of the bank earlier than previously known: during the second quarter of this year, when the board hired JPMorgan Chase and Co. to review “strategic alternatives.” The hiring of JPMorgan became known in late September.
The documents also show First Niagara drove the sale process, seeking potential bidders rather than reacting to inquiries by suitors.
In late July, First Niagara’s board directed JPMorgan to reach out to three financial institutions to gauge their interest: KeyCorp and two other unidentified banks.
On Sept. 9, the board authorized JPMorgan to invite KeyCorp and the two other banks to engage in a two-round bid process. A fourth financial institution that expressed interest was also invited to join the bidding. The board set up a “transaction committee” to guide management and JPMorgan through the process, and to recommend action about a “strategic transaction” to the full board, if necessary. The three board members chosen for the committee were Nathaniel Woodson – chairman of First Niagara’s board – Austin Adams and Carl Florio.
During the week of Sept. 13, KeyCorp and two other bidders reached confidentiality agreements with First Niagara. That gave them access to an electronic data room with nonpublic financial information about First Niagara. Over the next few weeks, the three banks conducted “due diligence” of First Niagara, including face-to-face meetings and conference calls between First Niagara executives and each of the bidders.
One of the first three bidders that JPMorgan had reached out to did not reach a confidentiality agreement with First Niagara and withdrew from the bidding in late September. That left three candidates in the running.
In mid-September, First Niagara’s management started holding weekly conference calls with the transaction committee, to update committee members on the bid process. Those weekly calls continued until a deal was announced.
On Sept. 22, news broke that First Niagara had chosen JP Morgan to explore alternatives. First Niagara wouldn’t confirm what it called “rumors.” But public scrutiny of First Niagara’s intentions picked up, and First Niagara’s share price increased.
First Niagara’s board held a regularly scheduled meeting on Sept. 30, reviewing the process with JPMorgan and evaluating the impact a deal would have on the bank as well as its stockholders, employees and communities. The board members also discussed First Niagara’s performance and how well each of the bidders would fit with First Niagara, as well as the potential business benefits of a combination with each. After taking everything into consideration, the board decided to continue with the bid process.
The next day, First Niagara chose a consultant, which was not identified in the documents, to conduct a valuation of First Niagara as a standalone entity.
The consultant assessed what could happen to First Niagara’s stock price if the board were to announce First Niagara was staying independent. Additionally, the consultant reviewed strategic initiatives First Niagara’s management had previously evaluated, and presented potential balance sheet restructuring and strategic actions First Niagara could take to improve its earnings.
In early October, each of the three bidders submitted a nonbinding “indication of interest” to First Niagara. KeyCorp’s offer consisted of 80 percent in common shares and 20 percent in cash. The other two banks’ offers consisted solely of common stock.
First Niagara’s fate – whether it would be sold or remain independent – was effectively sealed at an Oct. 12 board meeting. After reviewing reports and analysis, the board decided that First Niagara’s valuation as an independent bank was “likely to be materially lower than any of the proposals from the bidders, and that the potential decline in share price upon an announcement that First Niagara would remain independent was likely to be immediate and material.”
The board invited the three bidders to participate in a second round of bidding, and sent out a draft merger agreement to them. Three days later, the bank that had been the last one to join the bidding process dropped out. That left two banks – KeyCorp and one other – vying for First Niagara.
Over the next several days, the two bidders revised their draft agreements and continued their discussions with First Niagara. The Buffalo-based bank also began its own due diligence of the two bidders.
KeyCorp and the other bank on Oct. 26 each submitted a final nonbinding “indication of interest” to First Niagara and made presentations to the transaction committee. That night, the transaction committee recommended the full board continue negotiations with KeyCorp. The full board agreed, deciding that KeyCorp’s offer was superior, based on factors including the value of the deal, the perceived strategic fit, the outlook for KeyCorp’s shares, and the likelihood of KeyCorp obtaining regulatory approval in a timely fashion.
The next day, First Niagara board’s met with senior KeyCorp executives to review the deal, and authorized First Niagara’s management to work toward a definitive agreement. First Niagara ended discussions with the rival bidder.
KeyCorp and First Niagara finalized their deal in the next few days. A merger agreement was executed early on Oct. 30 and was announced before the market opened.
Some other details that emerged in the regulatory filing:
• First Niagara expects to pay JPMorgan $31 million for its services, including $5 million that was paid when JPMorgan delivered its opinion to the board. The remainder is payable if the merger goes through.
• KeyCorp expects to pay Morgan Stanley, which served as its financial adviser on the deal, a $16 million fee, including $13 million if the deal is completed.
• First Niagara has not yet identified which of its three board members it would like KeyCorp to add to its board.
• First Niagara does not expect to hold a 2016 shareholders meeting, as long as the merger is completed as expected in the third quarter of 2016.