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Zions to buy Amegy bank

Stock-market tumble signals investor concern

Harris Simmons
Harris Simmons

Zions Bancorp. announced Wednesday it has agreed to buy Houston-based Amegy Bancorp. in a deal valued at $1.7 billion in cash and stock.

The acquisition, Zions' largest-ever single bank buy, will give the Salt Lake-based bank holding company entry into the large and rapidly-growing Texas market. But activity in the stock market following Wednesday's announcement signalled concern by investors on both sides of the deal.

According to the agreement, the transaction includes $600 million in cash and about 14.25 million Zions stock shares. The cash portion will be funded with a combination of "hybrid and subordinated debt securities," the bank said in a prepared statement.

"This (acquisition) is compelling for both companies," said Harris Simmons, chairman and chief executive officer of Zions, during a Wednesday teleconference. "It expands the footprint of growth we had, and we think we really have the best exposure to growth markets in the industry. If you take the position Amegy has in the industry and add it to us, I think it makes us a unique franchise in the U.S.

"We think that this is a fabulous fit," Simmons said. "It's just hand-and-glove with what we've been able to do in other markets. We're very excited about this deal. The transaction economics work well for us, and really creates a base for us to expand, for years to come, in the Texas market."

In terms of assets acquired, the Amegy transaction, at $7.56 billion, is Zions' biggest. In 1998, Zions acquired Sumitomo Bank of California and its $5.1 billion in assets, which capped a flurry of purchases in 1997 and 1998 that included Grossmont Bank in California in November 1997 and Aspen Bancshares in Colorado ($450 million) in May 1997.

Currently, 38 percent of Zions' revenue comes from Utah. Following the Amegy acquisition, Zions estimates that number will fall to 31 percent.

Once the deal closes, Amegy will keep its name, charter, management team and board of directors — all important factors, according to Amegy's chief executive, Paul Murphy. Though takeover rumors have swirled around Amegy with intensifying force over the past few weeks, Murphy said the Texas bank wasn't forced into a deal with Zions or any other bank.

"Certainly, we could have continued," Murphy said. "We didn't have to do anything, but in making this move, we feel it's a very solid decision and we feel like all of our constituents will benefit in the long run."

Merging with Zions will allow Amegy to retain local control, while spreading its risk and costs, Murphy said.

Amegy, the largest independent bank in Houston, has 80 branches in the Houston/Dallas markets. Zions has about $31.9 billion in assets and operates more than 400 bank branches in Utah, Arizona, California, Colorado, Idaho, Nevada, New Mexico and Washington.

As part of the deal with Zions, Amegy investors will receive cash or stock valued at $23.32 a share, or 1.5 percent more than Tuesday's closing price, according to a statement released by the companies. In addition, Amegy said it will raise its quarterly dividend by 8 cents to 11 cents per share to bring it in line with Zions' dividend.

Investors showed signs of wariness Wednesday, as the share price for both companies dove.

Amegy's stock, which surged more than 31 percent between June 23 and Tuesday, declined $1.05 Wednesday to close at $21.93. And, shares of Zions tumbled as Fox-Pitt Kelton analyst Brian Harvey downgraded the bank, calling the purchase price "lofty" and saying the company is "stretched" too far.

Zions in the past "was critical of the industry's aggressive deal pricing," instead focusing on internal growth and share repurchases, Fox-Pitt's Harvey wrote in downgrading the stock to "in line" from "outperform." "With this transaction, the company has reversed course," he said.

Shares of Zions fell 6.4 percent on Wednesday, the most since October 2002, dropping $4.69 to $68.67 in composite trading on the Nasdaq Stock Market. Zions also said Wednesday it has suspended its share buyback program.

"The first thing that appears to be an issue is the price, and there's also a question of Zions' ability to cut costs here" since there's no geographic overlap between the banks, Thane Bublitz told Bloomberg News. Bublitz helps manage about $65 billion, including Zions shares, at Thrivent Financial for Lutherans in Appleton, Wis. "Still," Bublitz said, "it's an attractive franchise."

Zions will take about $70 million in restructuring-related charges following the merger, Chief Financial Officer Doyle Arnold said during the conference call. The combined company will earn about $5.31 a share in 2006 and $6.24 in 2007, he said.

Clark Hinckley, senior vice president at Zions, said though there are risks involved in any large transaction, and although the price Zions paid was "rich," the bank believes the potential for benefit outweighs the risks.

"In any kind of large transaction like this, there are a number of concerns people might have," Hinckley said. "It's a large price for this company, which means that it does dilute capital ratios. There are transaction risks. There is the concern: Can you make this work? Can you put these two banks together?

"But we believe that the benefits of this acquisition for Zions really far outweigh the risks," Hinckley said. "The execution risk is really quite small, because of the way we operate."

In the end, Simmons said, the acquisition "provides attractive growth opportunities in what is one of the largest and fastest-growing markets in the U.S."

"We really do believe that we have the highest growth footprint in the industry among the major banks," Simmons said, "And it only gets better as we add this bank to our family of banks."

Simmons also acknowledged that the merger has personal significance as well. After graduating from Harvard University's School of Business in 1980, Simmons said, he started his banking career in Texas at Allied Bank of Texas under Walter Johnson, Amegy's founder and chairman.

"I was interested in banking and thought that this was an incredible team," Simmons said. "Part of that team is with this bank (Amegy) today. It's something of a reunion, but it makes a great deal of sense from a strategic standpoint for our company."

The deal is subject to Amegy shareholder and regulatory approvals and is expected to be completed during the latter part of fourth quarter. Because of the size of the transaction, it does not require approval from Zions shareholders.

Contributing: Bloomberg News. E-mail: