(By Balachander) Hudson City Bancorp Inc. (NASDAQ:HCBK) shares were raised to "Outperform" from "Underperform" by RBC Capital Markets after the company agreed to be acquired by M&T Bank Corp. (NYSE:MTB) for $3.7 billion.
RBC is of the view that the deal will proceed as expected and the current valuation does not adequately consider the MTB stock price upside potential. The brokerage increased price target on HCBK shares to $8.75 from $6.00.
"We have long believed that HCBK could be a takeout candidate, but are surprised at the timing of the transaction given the low relative valuation," the brokerage wrote.
RBC said it had previously thought that HCBK would wait to try to diversify the balance sheet on its own before capitulating.
The brokerage believes that HCBK is now directly correlated with the expected stock price performance of MTB. RBC's 12-month price target on MTB is $105 per share.
"While there is some risk associated with the close of the deal and the outstanding MOU at HCBK that may place the dividend at risk, we would view the likelihood of either transpiring as low," RBC wrote.
"While the deal is priced below tangible book value and the pro forma estimated core deposit premium is relatively low at about 2 percent, we view the decision to merge with a strong, well-respected partner as the most important factor in the transaction," the brokerage said.
On Wednesday, HCBK shares added 0.28 percent to trade at $7.28, while MTB shares inched up 0.10 percent to $88.51.