At the onset of 2015, Hilltop Holdings Inc. (HTH) announced the closure of the acquisition of SWS Group Inc., once the regulatory approvals were attained. The deal was inked in Jan 2014, while the shareholders gave their consent as late as in November.
Hilltop Holdings already owned a 24.4% stake in SWS Group, after the company invested $50 million in the latter in 2011 through a five-year senior unsecured term loan. Additionally in Oct 2014, Hilltop purchased 8,695,652 shares of SWS Group common stock, which was issued as a warrant by SWS Group, with par value of 10 cents per share, exercised at a price of $5.75 per share, thereby gaining ownership of an additional 21% in the firm.
Per the agreement, the acquisition of the remaining stake on a per-share basis equated to 0.2496 of Hilltop stock and $1.94 of cash, totaling $6.92 per share based on Hilltop’s closing price of $19.95 on Dec 31, 2014. SWS Group closed at $6.91 a share on Dec 31, and with 33.5 million shares as on Sep 30, 2014, the firm was valued at about $231 million. Meanwhile, Hilltop Holdings’ total spending in SWS Group, including previous investments, is worth about $350 million.
Furthermore, SWS Group’s banking subsidiary – Southwest Securities, FSB – has been merged into PlainsCapital Bank, which was acquired by Hilltop Holdings in 2012 for over $800 million, thus making PlainsCapital the third-largest Texas-based bank by deposits. Additionally, SWS Group’s broker-dealer subsidiaries – Southwest Securities Inc. and SWS Financial Services Inc. – as well as First Southwest Co. and others have been merged with Hilltop Securities Holdings LLC.
Outlook
The acquisition blends well with Hilltop Holdings’ long-term growth strategy for its banking operations, and is expected to accentuate its enterprise value considerably. However, we are wary about the integration and execution risks of the merged operations. In view of limited upsides from the acquisitions in the near term and following a dismal third-quarter 2014 earnings, the Zacks Consensus Estimate for this Zacks Rank #4 (Sell) stock has also fallen 11.5% and 1.2% to $1.15 and $1.68 per share for 2014 and 2015, respectively, in the last 60 days.
Meanwhile, investors interested in the financial sector can consider other better-ranked stocks like Customers Bancorp Inc. (CUBI), Ladder Capital Corp (LADR) and Middleburg Financial Corp. (MBRG). Both these stocks sport a Zacks Rank #1 (Strong Buy).
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