Analysts are cautiously positive on TD Banknorth Inc.’s US$1.9 billion acquisition of Hudson United Bancorp, noting that it makes strategic sense, but that TD is paying a high price, and could be challenged to gain the planned synergies.

In a research note today, Standard & Poor’s Ratings Services says the transaction is consistent with TD Bank’s strategy to use Banknorth as its principal vehicle for retail and commercial banking expansion in the U.S. However, it notes that “given the leverage and high premium that is being paid, TD Bank will be more limited in future to support acquisitions the size of Hudson United.

“Although the acquisition will expand Banknorth’s reach, it represents considerable integration risk due to the transaction’s size and complexity,” S&P adds. “Furthermore, the acquisition represents little branch overlap, and thus we view the cost savings assumptions as challenging, although TD Banknorth has reaped similar efficiencies in prior acquisitions.”

“The ultimate success of TD Bank’s U.S. market expansion will in part depend on Banknorth’s ability to
continue implementing its local bank strategy and expanding its presence in new and existing markets,” S&P concludes.

Fitch Ratings says that it believes the prospective transaction is for the most part a good strategic fit from both a geographic and business line standpoint. It says that it expects the banks to integrate with little disruption, adding, “The acquisition enhances its Connecticut franchise and helps to fill-in its branch network in Eastern New York State, while giving it entry into the New Jersey and Philadelphia markets.”

However, it also notes that, “while the transaction is viewed positively from a strategic point, BNK is paying a seemingly high price for the HU franchise. As such, BNK will need to realize projected cost saves and achieve anticipated revenue improvements, which are critical to the success of the transaction. To that end, Fitch’s believes that it is likely that BNK will need to invest more into HU’s retail franchise than currently projected.”

“In addition to addressing HU’s retail franchise, BNK will face integration challenges associated with HU’s specialty business lines and [the fact that] that HU is currently operating under a regulatory agreement. In light of the integration challenges presented by this transaction, Fitch would view negatively the addition of other significant integration challenges over the near to intermediate term,” it says.

Fitch reiterates its view that TD must build tangible capital levels to provide support for its current ratings. Regulatory capital measures remain sound; however, intangibles arising from acquisitions have pressured tangible capital, it suggests. “As previously announced, Fitch believes TD’s pending sale of TD Waterhouse USA to Ameritrade Holding Corporation will have a slight positive impact on tangible capital. As currently structured, BNK’s proposed acquisition of HU will reduce this benefit,” it says. “Further slow downs in the recovery of TD’s tangible capital will pressure TD’s long-term and short-term ratings.”

Dominion Bond Rating Service says the deal makes strategic sense, but notes challenges for TD Banknorth include addressing compliance issues to satisfy the regulator (Federal Deposit Insurance Corporation), improving the productivity of Hudson’s branch network, and higher integration risk (given the size of the acquisition relative to historical purchases). These challenges are partially mitigated by TD Banknorth’s history of executing acquisitions and the moderate level of planned expense savings, it added.

DBRS confirmed its ratings of TD, “because the transaction is consistent with TD’s strategy to use TD Banknorth’s stock to participate in bank consolidations in the U.S. The acquisition maintains TD’s conservative retail/wholesale earnings mix and the bank’s conservative credit risk profile as Hudson is primarily involved in middle-market commercial lending, and asset quality has been good over the past five years.”

Fitch also affirmed its ratings of TD, and placed Hudson on Rating Watch Positive. S&P said that the ratings on TD would not be affected by the deal.