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Speaker 2: We had an M and A trade.
Speaker 3: Had a few M and A trades hit the tape
Speaker 3: here this morning, one including the regional bank business, maybe
Speaker 3: a super regional bank to be Herman Chen, Bloomberg Intelligence,
Speaker 3: senior analyst for US regional banks, hunting to bank shares,
Speaker 3: buying Cadence.
Speaker 2: Herman talking to us about this deal. What's going on here?
Speaker 4: So, Huntington's fresh off of a deal in Texas. They
Speaker 4: just closed the Veritext deal which added to face Right
Speaker 4: and turned Texas through the Veritext merger. And they're doubling
Speaker 4: down in Texas, adding Cadence, which is in the Houston
Speaker 4: market primarily and also some slower gross Southeast market. It's
Speaker 4: like Birmingham two below. They have some exposure to Arkansas
Speaker 4: and Missouri, but Texas is really the prize.
Speaker 5: Texas is really the prize in Cadence. I believe has
Speaker 5: two headquarters, one in Houston, one in Tupelo. So Huntington
Speaker 5: now has presence in twenty one states.
Speaker 6: And it becomes a super regional. That term super regional.
Speaker 5: What does that mean in terms of regular regulation and
Speaker 5: what kind of capital needs to hold on its bounce stream?
Speaker 4: Yeah, so that's that's a good question. It will clear
Speaker 4: the two hundred and fifty billion asset mark, which is
Speaker 4: a step up in regulation. Really, all that means is
Speaker 4: there's more regulatory reporting, there's a tougher regulation in regards
Speaker 4: to liquidity. But overall, should it mean too much for Huntington?
Speaker 4: And we are expecting some deregulatory efforts from the Fed
Speaker 4: later down the next few months, so that should actually
Speaker 4: work out in Huntington's favor. And I think what we're
Speaker 4: seeing is that just the regulatory efforts increasing M and
Speaker 4: A transactions as a result of the Trump administration being
Speaker 4: very more open to deal making. And you're seeing that
Speaker 4: playouts not only in this deal, but also with the
Speaker 4: Third buying Comerica and also P ANDC buying a bank
Speaker 4: in Denver, First Bank, So more transactions to come.
Speaker 2: Wow, what's the upside for Huntingdon bank shares here? In
Speaker 2: getting bigger.
Speaker 4: Yeah, so they are doubling down in higher growth markets.
Speaker 7: Right.
Speaker 4: So Huntington is based mostly in the Midwest, Upper Midwest,
Speaker 4: lower growth demographics. They've focused on not only hiring folks
Speaker 4: in national businesses, but also expanding in areas like the Carolinas.
Speaker 4: They were doing an organic push in Texas before the
Speaker 4: Veritext deal. So the management team's being much more aggressive,
Speaker 4: and they talked about improving their return profile, increasing their
Speaker 4: return on tangible equity by two hundred basis points over
Speaker 4: the medium term. So the higher, the greater scale, the
Speaker 4: better growth demographics really will fall to the bottom line.
Speaker 5: So what I found interesting in this Hermann is that
Speaker 5: earlier this year Cadence bought another bank industry bank shares.
Speaker 5: Who's a buyer, who's a seller in this great regional
Speaker 5: bank m and a thing that we're seeing.
Speaker 4: Yeah, I think what you're seeing today is and I'm
Speaker 4: just looking at the Kerry Index and all these Texas
Speaker 4: based institutions that are part of that are getting bid up,
Speaker 4: like banks like Prosperity First Financial.
Speaker 8: Origin.
Speaker 4: These are We've seen a number of bank deals in Texas,
Speaker 4: both larger and smaller. Remember, coll America is a Texas
Speaker 4: based bank as well. So these are that's that seems
Speaker 4: to be the area of choice for these regionals and
Speaker 4: we're seeing that activity really pick up.
Speaker 2: Stay with us more from Bloomberg Intelligence coming up after this.
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Speaker 3: No Artist agrees to buy Avidity in a twelve billion
Speaker 3: dollar biotech deal, Sam Fazzelli, you became an analyst, You
Speaker 3: should have become a banker.
Speaker 2: I don't know what you're thinking.
Speaker 3: Back in the day, Sam Fazzelli, Director of Research for
Speaker 3: Global Industries and the Senior Farmer Analysts Folks is one
Speaker 3: of the best out there on the street or in
Speaker 3: the city of London, as they say, for Bloomberg Intelligence.
Speaker 3: Is this just another deal kind of right out of
Speaker 3: central casting, Sam, Pharma buying biotech?
Speaker 7: Yeah, well, so, Paul, before we do that, can I
Speaker 7: just make sure that when we come back in our
Speaker 7: next life, can I work with you there we both
Speaker 7: do this together, and can just you know, go and no,
Speaker 7: but look, farmer copies. The story is similar here. We
Speaker 7: have a company here of artists doing okay. They have
Speaker 7: a atent exspirery that they're dealing with. Now remember that phrase,
Speaker 7: it's always the one that rears itsumily head eventually, which
Speaker 7: is good for consumers and drug budgets, but obviously in
Speaker 7: the end bad for the top and bottom line of
Speaker 7: pharma companies. They have another drug that's really big, expected
Speaker 7: to hit about seven point four billion dollars of sales
Speaker 7: by twenty twenty nine twenty thirty, called Cocentics that's going
Speaker 7: to go off pattern. So what do they need. They
Speaker 7: need assets and products to feed it. They do their
Speaker 7: own R and D, but here they also have an
Speaker 7: opportunity to go and get really exciting stuff from biotech companies,
Speaker 7: which is exactly what Novartist is doing twelve billion dollars
Speaker 7: for Avidity Biosciences. And then what they're getting here is
Speaker 7: three products there are at different stages of development but
Speaker 7: very soon to get to hit the market, all rare diseases.
Speaker 7: So it's one that's harder for people to argue against
Speaker 7: in terms of price, et cetera. And it will help
Speaker 7: them with that post twenty twenty nine, twenty thirty revenue
Speaker 7: growth and earnings growth, so pretty much fits perfectly in
Speaker 7: this sweet spot of what they need and what this
Speaker 7: company and for their growth and also their technology platforms.
Speaker 5: Sam you laid out beautifully strategically why Novartists is buying Avidity.
Speaker 5: The CEO of Novartists, Vasenara Simhun, has been making some deals,
Speaker 5: but mostly they've been focused on deals under five billion dollars.
Speaker 5: Regular therapeutics you bought for one point seven billion, and
Speaker 5: those therapeutics also in that neighborhood. Is this purchase, this
Speaker 5: twelve billion dollar purchase a shift in strategy?
Speaker 7: Yeah, I mean it's so hard us on lists, we
Speaker 7: love asking a pharma companies, so what kind of deals
Speaker 7: are you going to be doing? And you go back
Speaker 7: and look at the Q two results. Ah, we like tukens,
Speaker 7: et cetera. Right, and here we go. I mean, you know,
Speaker 7: in my world, a tuck in is three to five
Speaker 7: billion dollars, two to four billion dollars that sort of size.
Speaker 7: So but they all give you this caveat we will
Speaker 7: be opportunistic. And I think here there was an opportunity,
Speaker 7: an opportunity that came up to access some very novel technology.
Speaker 7: I have to say, it's really interesting what these guys
Speaker 7: are doing, and it's late stage enough for it to
Speaker 7: make a difference to the bottom line of the company,
Speaker 7: and it's not after you get that mix. So I
Speaker 7: think the artists decided this is this takes so many
Speaker 7: boxes that it was worth doing. Particularly it fits also
Speaker 7: with their internal assets and their approach to some of
Speaker 7: the other diseases. So it is really pretty good, pretty
Speaker 7: good fit.
Speaker 8: Sam.
Speaker 3: Is the patent runoff or expiration for this industry?
Speaker 2: Is it abnormally high these days?
Speaker 3: Or is this this kind of a normal course of business,
Speaker 3: because it seems like we hear about it more and
Speaker 3: more or less several years.
Speaker 7: Well, the companies have got bigger, there's broader pipelines, and
Speaker 7: you know, I mean there was a period where it was,
Speaker 7: you know, we had the pattern cliff in the twenty
Speaker 7: ten eleven twelve time period. I don't remember exactly. It
Speaker 7: was a while ago now and now we have another.
Speaker 7: It's not quite a cliff, it's a hill that but
Speaker 7: this is this is how it should be. These companies
Speaker 7: get rewarded with reasonable pricing for the ten to twelve years,
Speaker 7: and then it becomes generic so that it creates more
Speaker 7: space in the drug budgets for the governments to pay
Speaker 7: for the next good drug. So I don't think there's
Speaker 7: anything new here, which is it varies by company by company, Sam.
Speaker 5: We know that Novartis is going to be reporting earnings tomorrow,
Speaker 5: I believe, and it's already raised its profit outlook I
Speaker 5: believe two times. What are you anticipating is how much
Speaker 5: is it going to tell us in terms of whether
Speaker 5: this deal, this Avidity deal will add to earnings in
Speaker 5: the near term.
Speaker 7: Yeah, but they already told us that they think that
Speaker 7: it's going to be clearly dilutive next year. And of course,
Speaker 7: as soon as you do these deals, a large amount
Speaker 7: of the value goes into what's called IPR and D,
Speaker 7: which which you have to charge to your p and
Speaker 7: lic cont just put it onto a goodwill anymore and
Speaker 7: just live with that as an intangible. So here there
Speaker 7: would be dilution next year, but I think they could
Speaker 7: start seeing some at least a positive contribution maybe from
Speaker 7: twenty seven to twenty eight on Wehre's definitely twenty nine
Speaker 7: thirty as these drugs hit the market. Of course, they
Speaker 7: have to still get to the market and they have
Speaker 7: to be successful. But the drugs are looking really interesting
Speaker 7: and the dates is looking very powerful.
Speaker 2: Stay with us. More from Bloomberg Intelligence coming up after this.
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Speaker 5: All right, let's talk about what's happening in the Caribbean.
Speaker 5: Hurricane Melissa plowing towards Jamaica. It's a powerful Category five storm,
Speaker 5: the third Category five storm this Atlantic season, and Melissa
Speaker 5: threatens to bring widespread destruction to the island. Matthew Paalazola
Speaker 5: has been monitoring this development. He is the senior analyst
Speaker 5: of p See Insurance for Bloomberg Intelligence, and he joins
Speaker 5: us now with more. Matt, good to speak with you
Speaker 5: when you try to figure out what kind of economic
Speaker 5: damage this storm could reak.
Speaker 6: What historical analogs are you using?
Speaker 8: Yeah, so it is a lot easier for the US.
Speaker 9: We have a lot more data, a lot more storms
Speaker 9: for this one. The method we use as the same,
Speaker 9: We look at older storms, older hurricanes, and we try
Speaker 9: to see in what they did, we adjust for property
Speaker 9: values inflation and try to come up with something. The
Speaker 9: issue has been there haven't been a lot of major
Speaker 9: hurricanes that have made landfall on Jamaica. It's really only
Speaker 9: two since nineteen eighty actually hit the island. A bunch
Speaker 9: of passed. The one that we're looking at is nineteen
Speaker 9: eighty eight Hurricane Gilbert, and that one there's not great
Speaker 9: insurance data, there's not great damage data. The best we
Speaker 9: can find was one hundred thousand homes wiped out power communication,
Speaker 9: killed forty five people. The economic damage, inflation adjusted, maybe
Speaker 9: in the mid single digit billions. The way Melissa's shaping
Speaker 9: up could be a lot worse than that.
Speaker 3: Actually, So in your note, you're saying that Jamaica has
Speaker 3: a low insurance penetration, and but what coverage is written
Speaker 3: there is heavily seated.
Speaker 2: What does that mean?
Speaker 9: So that means that it's your your favorite business, Paul's
Speaker 9: heavily seated to reinsurance. That's so you know, I was
Speaker 9: talking about one hundred thousand homes ashured in Gilbert. That's
Speaker 9: where the low insurance penetration comes in. So people's homes there,
Speaker 9: they just they don't have insurance on them, so there'll
Speaker 9: be a wide gap between the economic losses and the
Speaker 9: insured losses. So that's kind of a real unfortunate aspect
Speaker 9: of this. Like the resorts and things like that will
Speaker 9: have insurance on them, that'll be the majority of the
Speaker 9: insured losses. But so that's what we're saying with the
Speaker 9: low penetration and even all any of the business there
Speaker 9: is heavily seated to the reinsurance market.
Speaker 6: So which reinsurers then are exposed?
Speaker 8: You think, So, I don't. I don't have specific names
Speaker 8: to be a lit over remiss.
Speaker 9: You hear about Lloyd's of London kind of does you
Speaker 9: know one off or special risks like this, So you
Speaker 9: might have a big, a big resort that might you know.
Speaker 8: Have a policy with them.
Speaker 9: So a lot of the business might not be written
Speaker 9: by the domestic companies. We cover the Bermuda reinsurance companies,
Speaker 9: and it wouldn't be surprised if they had some the
Speaker 9: big big European companies like Swiss Raad Munich Race. So
Speaker 9: those are kind of the usual suspects, but I wouldn't
Speaker 9: ascribe losses to any of them, just Yet.
Speaker 3: When I owned a home in California, it got to
Speaker 3: the point where the only place we could get home
Speaker 3: insurance was Lloyd's of London. Really, I mean as saying,
Speaker 3: people who ensure you know, tankers going through the strait
Speaker 3: of her moves.
Speaker 2: That's why I had to.
Speaker 6: Go to Well, no one's even doing that now. You
Speaker 6: only have the state insurers, the lender of nature of
Speaker 6: last resort.
Speaker 4: At this point, I think mine is like Joe's Insurance
Speaker 4: of South Jersey, only one.
Speaker 3: Exactly talk to us about the hurricane season for from
Speaker 3: your perspective, it doesn't seem like it's been that bad.
Speaker 8: No, it's been. It's been quite good for.
Speaker 9: People who suffer from hurricane losses and for insurance companies.
Speaker 9: So very mild. I think minimal US activity. We look
Speaker 9: at catastrophe lost estimates for our companies. We started off
Speaker 9: the year with the wildfires and I said, oh, no,
Speaker 9: like this is going to be bad. We're going to have,
Speaker 9: you know, major another major hurricane. It was going to
Speaker 9: be pretty significant. Third quarter was very mild. We've only
Speaker 9: seen a couple of companies report earning so far. Those
Speaker 9: have been good. The catastrophellas have been very low, so
Speaker 9: hurricane season mild. This is pretty rare to have a
Speaker 9: major hurricane this late. We did a hurricane Sandy was
Speaker 9: around this time when it hit. But the hurricane season
Speaker 9: technically runs through November. But it's pretty rare for major
Speaker 9: storms to hit that late.
Speaker 5: Yeah, hurricane season officially ends November thirty, so we just
Speaker 5: have to get through the next month or so. Matt,
Speaker 5: if you have a mild hurricane season, does that mean
Speaker 5: people's insurance premiums won't go up at that stay static?
Speaker 8: Probably not.
Speaker 2: That's pretty as.
Speaker 8: Yeah, no bologna on that one either.
Speaker 9: But yeah, and the issues behind home insurance haven't necessarily
Speaker 9: been the large losses. It's been inflation and building materials.
Speaker 9: It has been kind of poor regulation in certain markets
Speaker 9: like Florida and California and causing reinsurance rates to go up.
Speaker 9: So the things that are driving that hasn't necessarily been
Speaker 9: these these large losses.
Speaker 5: When is the next wildfire season or is there even
Speaker 5: a wildfire season or is it kind of year around now?
Speaker 9: Yeah, so in California there are times where the Santa
Speaker 9: Ana wins are stronger. I don't have the exact dates
Speaker 9: off the top of my head. There kind of are
Speaker 9: seasons to it, but you know they could break out
Speaker 9: kind of at any time.
Speaker 2: How are they property and casualty socks doing this year?
Speaker 9: Yeah, not great. So you know, despite the mild hurricane season,
Speaker 9: good jumps and book value good are 's The fundamentals
Speaker 9: are I think past the peak. So the valuations of
Speaker 9: these stocks on a price to book basis usually peak
Speaker 9: before they're ros. The ros have probably peaked. It's tough
Speaker 9: to see. I keep saying it, and they keep kind
Speaker 9: of incrementally being a little bit better, but it's tough
Speaker 9: to see their underwriting get better next year. Interest rates
Speaker 9: clearly are you know, at least going slightly down by
Speaker 9: step by step. So the fundamentals are not great. Valuations
Speaker 9: were high, so going into the year it was not
Speaker 9: great for performance.
Speaker 6: Does that mean there's going to be M and A
Speaker 6: in this sector?
Speaker 8: Probably not.
Speaker 9: So the issue there is these companies have reserves, right,
Speaker 9: so we write liability business for things that happen and
Speaker 9: it could impact me many years in the future. What
Speaker 9: has been happening is those losses from the past have
Speaker 9: been higher than companies expected. So you'd be remiss to
Speaker 9: want to buy another company and have this book of
Speaker 9: business that could be worse than you expected. It's usually
Speaker 9: the biggest obstacle to m and asrugs.
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