UBS confirms deal to acquire Credit Suisse for $3.25B in stock

UBS (NYSE:UBS) confirmed on Sunday that it agreed to acquire struggling Credit Suisse (NYSE:CS) for a total of CHF 3B (US$3.25B) in a stock-based transaction that also provides downside protection for the larger UBS. The deal was struck in an effort "to restore necessary confidence in the stability of the Swiss economy and banking system," Credit Suisse said.

The transaction, the result of a Swiss government-led negotiation, has the full support of Swiss Federal Department of Finance, Finma, and the Swiss National Bank.

Under the terms of the agreement, Credit Suisse (CS) shareholders will get one UBS share for every 22.48 Credit Suisse shares, equivalent to CHF 0.76/share. Credit Suisse shares last traded at CHF 1.86 in Zurich on Friday.

"UBS (UBS) benefits from CHF 25 billion of downside protection from the transaction to support marks, purchase price adjustments and restructuring costs, and additional 50% downside protection on non-core assets," UBS said. In addition, both banks have unrestricted access to the Swiss National Bank existing facilities, which can provide liquidity to them according to guidelines on monetary policy instruments.

On Sunday, Credit Suisse (CS) was informed that Finma has determined that Credit Suisse's Additional Tier 1 Capital in the aggregate nominal amount of ~CHF 16B will be written off to zero.

The combination of the two banks is expected to generate annual run-rate of cost reductions of more than $8B by 2027. UBS (UBS) expects the deal to add to EPS by 2027 and the bank remains capitalized well above its target of 13%.

The transaction isn't subject to shareholder approval. UBS (UBS) has obtained pre-agreement from Finma, Switzerland's financial markets authority; Swiss National Bank; ths Swiss Federal Department of Finance and other core regulators.

That unusual provision is likely to trigger legal and political resistance, said Octavio Marenzi, CEO of management consultancy Opimas. "First, the Federal Council has made use of emergency powers to force this merger through. A legal challenge by Credit Suisse shareholders, who will claim that their property has been illegally confiscated, is guaranteed."

UBS (UBS) shareholders may also protest the transaction, as risk from Credit Suisse (CS) "could prove to be a mill stone around UBS’ neck that will drag both banks under," he added.

Overall, the government-sponsored deal has ramifications for other Swiss Financial institutions, Marenzi said. "A country-wide reputation with prudent financial management, sound regulatory oversight, and, frankly, for being somewhat dour and boring regarding investments, has been wiped away."

Credit Suisse (CS) said it continues to operate in the ordinary course of business and implement its restructuring in collaboration with UBS (UBS).

The combination increases UBS's lead in its Swiss home market and creates a leading global wealth manager with $5T of invested assets across the group, UBS (UBS) said. Its strategy remains unchanged, including its focus on growth in the Americas and Asia-Pacific.

"The transaction reinforces UBS’s position as the leading universal bank in Switzerland. The combined businesses will be a leading asset manager in Europe, with invested assets of more than USD 1.5T," the company said.

Management will hold an analyst call at 10 PM CET (5:00 PM ET).

Credit Suisse (CS) Chairman Axel P. Lehmann said, "Given recent extraordinary and unprecedented circumstances, the announced merger represents the best available outcome."

See previous Seeking Alpha coverage of Credit Suisse:

• Earlier, Bloomberg reported that UBS agreed to buy Credit Suisse for ~$2B
• Credit Suisse was said to oppose $1B UBS takeover
• On March 17, USB was reported to be in talks to take over Credit Suisse
• Some banks were said to be limiting trades with Credit Suisse
• Credit Suisse stock initially jumped on March 16 when it said it obtained a $54B loan from the Swiss National Bank
• On March 15, the Switzerland's central bank said it would provide Credit Suisse with liquidity if needed

Seeking Alpha contributor IP Banking Research on March 18 discussed implications of a CS/UBS shotgun wedding