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Value of Key’s First Niagara deal falls 15%

First Niagara Financial Group shareholders will vote next month on a takeover by KeyCorp currently worth about 15 percent less to them than when it was announced in October.

KeyCorp and First Niagara each scheduled a special shareholders meeting for March 23 to vote on Key’s proposed acquisition of First Niagara. The dates of the meetings and other merger details were included in a regulatory filing.

Over more than three months, the value of the deal has dropped because Key’s stock price has declined. Under terms of the cash-and-stock deal disclosed Oct. 30, First Niagara shareholders will get 0.68 shares of Key and $2.30 per share for each of their shares. Based on Key’s closing price of $13.38 for Oct. 29 – the day before the merger was announced – the value of their compensation was $11.40 per share.

But Key’s share price has fallen by 18 percent since then, closing at $10.91 on Thursday. That means that First Niagara shareholders would receive only $9.72 per share.

As a result, the value of Key’s deal for First Niagara has fallen to about $3.5 billion, from $4.1 billion. That figure could go up or down, depending on where Key’s stock price goes.

Jeff K. Davis, managing director of Mercer Capital’s Financial Institutions Group, doesn’t think the current drop in the deal’s value will prompt First Niagara shareholders to reject it.

“First Niagara’s just floating with KeyCorp right now, and that’s just how it is,” Davis said.

If Key’s stock were to fall dramatically, First Niagara shareholders might vote to reject the deal, Davis said, but many banks’ share prices – not just Key’s – have fallen amid a weak stock market.

First Niagara’s stock price is down by 9.4 percent since the deal was announced.

Another factor is that about 80 percent of First Niagara’s shares are held by institutional investors or mutual fund holders. Davis said that if institutional shareholders really disliked the deal, they likely would have sold their shares just after it was announced.

The price of bank mergers has fluctuated with the market before. M&T Bank Corp.’s deal for Hudson City Bancorp was pegged at $3.7 billion when it was announced in 2012, but ended up at $5.3 billion when it closed in November, because M&T’s share price rose in the interim.

Deals are much more appealing to shareholders in a rising market, Davis said. Had Key’s deal for First Niagara been presented to First Niagara shareholders a couple of years ago, when Key’s share price was rising, he said, “they would be all grins. But there’s a yin and a yang, and this is the yang.”

The boards of Key and First Niagara have already approved their deal, and recommend that their shareholders vote in favor. “Your vote is very important, regardless of the number of KeyCorp common shares or shares of First Niagara common stock you own,” the banks wrote to shareholders.

Key and First Niagara are mailing proxy cards to shareholders this week, allowing them to vote without attending the meeting. Only shareholders of record as of Feb. 1 may vote. The banks want to complete the deal in the third quarter, subject to approval by regulators.