NEW YORK (Bloomberg) -- Toronto-Dominion Bank agreed to buy Chrysler Financial Corp. from Cerberus Capital Management LP for $6.3 billion in cash, adding an auto-finance company in its second-largest acquisition.
The purchase includes $5.9 billion in assets and about $400 million in goodwill, Canada's second-biggest bank said today in a statement. Toronto-Dominion doesn't intend to issue stock or bonds.
Canadian lenders, ranked the soundest by the World Economic Forum, are using their excess capital to expand abroad after asset values plunged following the financial crisis. Bank of Montreal last week made its biggest acquisition, agreeing to pay $4.1 billion in stock for Marshall & Ilsley Corp., Wisconsin's biggest bank.
Toronto-Dominion Bank expects U.S. earnings to top its target of $1.6 billion a year in three years with the Chrysler Financial purchase, Chief Financial Officer Colleen Johnston told analysts today on a call. That compares with a profit of about $1 billion in the year that ended Oct. 31. The Toronto-based lender owns a consumer bank with 1,300 branches in 16 U.S. states and is the largest shareholder in TD Ameritrade Holding Corp.
“This is a really good way to put those deposits in the U.S. to work,” said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, which manages about $4 billion, including Toronto-Dominion shares.
“This is further execution of their U.S. strategy to touch more clients.”
Chrysler Financial, based in suburban Detroit, has about 1,850 employees and will have about $7.5 billion in loans at the closing of the transaction, according to an investor presentation Toronto-Dominion published today. About 90 percent of the loans are in the U.S., and 10 percent in Canada. Chrysler Financial isn't related to Chrysler Group LLC, the company that is now controlled by managers from Fiat S.p.A.
“With this deal, we are positioned to become a top-five bank-owned North American auto lender,” Toronto-Dominion CEO Edmund Clark said in the call with analysts.
Adds to earnings
The transaction is expected to close in the second quarter of 2011 and add about $100 million to Toronto-Dominion's earnings by 2012. The bank forecasts new loan origination of about $1 billion a month the following year.
Toronto-Dominion is recognizing the net value of the assets at $5.9 billion on its own books, more than the $5.2 billion value on Chrysler Financial's, according to a person with knowledge of the transaction.
Based on Chrysler Financial's value, Toronto-Dominion is paying about 1.2 times the book value, the person said. When General Motors Co. bought AmeriCredit Corp. in a $3.5 billion deal in October, it paid about 1.4 times the book value AmeriCredit assigned itself, according to Bloomberg data.
Toronto-Dominion left about $1 billion of loans behind with Cerberus, Clark said in an interview.
Cerberus, led by founder Stephen Feinberg, wagered on the U.S. auto industry with takeovers of General Motors Corp.'s auto lender in 2006, followed by the Chrysler automaker and lender the following year. The deals preceded a decline in U.S. auto sales that sent both carmakers into bankruptcy.
Feinberg, 50, subsequently lost control of both GMAC and Chrysler and held on to Chrysler Financial. The lender repaid its $1.5 billion in U.S. Treasury Department bailout funds last year and in July sought to return to large-scale lending.
Cerberus will recoup about 90 percent of its initial investment in Chrysler after the sale of the automaker’s former lending unit to Toronto-Dominion, according to two people with knowledge of the transaction.
Cerberus will get about 75 cents on the dollar in cash when the sale of Chrysler Financial Corp. closes, said the people, asking not to be identified because the firm is private. Including assets Cerberus is retaining as part of the deal, valued at about $900 million, the company will be left with a loss of 10 percent on the initial investment in the automaker and its finance arm.
Toronto-Dominion Bank estimates the size of the auto-lending market in the U.S. is about $700 billion, and the industry is projected to grow by $200 billion over the next three years.
The acquisition would be the biggest of a U.S. lender since Wells Fargo & Co. bought Wachovia Corp. in December 2008 for about $15 billion. Citigroup Inc., JPMorgan Chase & Co., and Sandler O'Neill & Partners LP are advising Cerberus on the transaction.
Toronto-Dominion has spent about $19.6 billion over the past six years building a consumer-bank network that spans from Maine to Florida. Acquisitions included Portland, Maine-based Banknorth Group and Commerce Bancorp of Cherry Hill, N.J.
Clark, 63, expressed an interest last month in entering automobile leasing in Canada, which domestic banks have been banned from doing since 1980. The Canadian government has been looking at changing regulations. Bank of Nova Scotia, Canada's third-largest bank, purchased as much as $20 billion in auto loans from General Motors in 2005.
This quarter is the biggest for Canadian bank takeovers into the U.S. in at least 12 years based on dollar value, according to Bloomberg data.