TD Bank 2006 Annual Report Download - page 19

TD BANK FINANCIAL GROUP ANNUAL REPORT 2006 Management’s Discussion and Analysis 15
2006 SIGNIFICANT EVENTS
Acquisition of VFC Inc.
Effective May 15, 2006, the Bank owned all of the issued and
outstanding common shares of VFC Inc. (VFC), a leading provider
of automotive purchase financing and consumer instalment
loans. The acquisition of VFC’s issued and outstanding common
shares resulted in a total purchase consideration of $328 million,
comprising cash paid, common shares of the Bank issued and
acquisition costs. The acquisition was accounted for by the
purchase method. VFC’s results are reported in the Canadian
Personal and Commercial Banking segment.
VFC’s results for the period from acquisition to October 31,
2006 have been consolidated with the Bank’s results.
TD Banknorth
In 2006, TD Banknorth repurchased 8.5 million of its own shares
for $290 million and the Bank acquired 1 million additional
shares of TD Banknorth for $34 million in the course of
open-market purchases. In addition to the TD Banknorth shares
acquired by the Bank in relation to the Hudson transaction
(described below), the Bank began reinvesting in TD Banknorth’s
dividend reinvestment program in November 2005 and, as
at October 31, 2006, had acquired 4 million shares of TD
Banknorth pursuant to the program. As at October 31, 2006,
the Bank’s ownership interest in TD Banknorth was 57%, an
increase from 55.5% as at October 31, 2005.
On November 20, 2006, the Bank announced its intention to
acquire all of the outstanding common shares of TD Banknorth
that it does not already own. The acquisition will be accounted
for by the purchase method. The offer provides minority share-
holders of TD Banknorth cash of US$32.33 per TD Banknorth
share. Total consideration will be approximately $3.6 billion.
The offer is subject to approval by regulators and TD Banknorth
shareholders and, if approved, is expected to close by April 30,
2007. Upon completion of the going-private transaction, TD
Banknorth will become a wholly-owned subsidiary of the Bank.
We project that the Bank’s earnings per share (EPS) accretion,
on areported basis, for the proposed transaction would be
$0.02 per share for the six months in 2007 and $0.12 per share
in 2008. The accretion on the Bank’s EPS, on an adjusted basis,
which in this case is before the amortization of intangibles, is
projected to be $0.05 per share for the six months in 2007 and
$0.16 per share in 2008.1
Hudson United Bancorp
On January 31, 2006, TD Banknorth completed the acquisition
of Hudson United Bancorp (Hudson) for total consideration of
$2.2 billion, consisting of cash consideration of $1,073 million
and the remainder in TD Banknorth common shares. The cash
consideration was funded by the sale of TD Banknorth common
shares to the Bank. TD Banknorth consolidates the financial
results of Hudson. The transaction resulted in a dilution loss for
the Bank of $72 million.
Interchange Financial Services Corporation
On April 13, 2006, TD Banknorth announced an agreement to
acquire Interchange Financial Services Corporation (Interchange)
for US$480.6 million cash consideration. The deal is expected to
close in TD Banknorth’s first calendar quarter of 2007.
Cash for the transaction will be financed primarily through
TD Banknorth’s sale of approximately 13 million of its common
shares to the Bank at aprice of US$31.17 per share, for approxi-
mately US$405 million. Based on the Bank’s ownership interest
as at October 31, 2006, the impact of this transaction is expect-
ed to bring the Bank’s percentage ownership of TD Banknorth
to 59.3%.
TD Waterhouse U.S.A. and Ameritrade
On January 24, 2006, the Bank closed the transaction involving
the sale of its U.S. brokerage business, TD Waterhouse U.S.A.,
at a fair market value of $2.69 billion to Ameritrade Holding
Corporation (Ameritrade) in exchange for a 32.5% ownership
in the combined legal entity operating under the name “TD
Ameritrade”. The transaction resulted in a net dilution gain
on sale of $1.67 billion after-tax during the year ($1.64 billion
pretax).
In connection with the transaction, TD Waterhouse Canada
acquired 100% of Ameritrade’s Canadian brokerage operations
for $77 million cash consideration.
Pursuant to the terms of the TD Ameritrade Stockholders
Agreement, the Bank’s beneficial ownership of TD Ameritrade is
currently limited to 39.9% of the outstanding voting securities.
This limit will increase to 45% in January 2009.
The Bank acquired 44.4 million shares for $939.1 million
through open market purchases, which resulted in the Bank’s
ownership interest in TD Ameritrade increasing to 39.8% as at
October 31, 2006.
The Bank reports its investment in TD Ameritrade using the
equity method of accounting. The fiscal periods of the Bank and
TD Ameritrade are not coterminus. The Bank’s equity share of TD
Ameritrade’s results from the acquisition date to September 30,
2006, has been reported in the Bank’s results for the fiscal year.
On September 14, 2006, the Bank announced an arrangement
with Lillooet Limited (Lillooet), acompany sponsored by Royal
Bank of Canada, pursuant to which the Bank hedged the price
risk related to 27 million shares of TD Ameritrade. The number of
shares hedged and the hedge price was determined based on
market conditions over a specified hedging establishment period.
The purpose of the arrangement with Lillooet is to provide the
Bank with price protection in the event it decides to increase its
beneficial ownership in TD Ameritrade in 2009. The arrangement
provides that Lillooet must make a payment to the Bank in early
2009 in the event that the trading price of TD Ameritrade shares
is in excess of a specific amount. If the trading price of TD
Ameritrade shares is below such amount, the Bank will be
required to pay Lillooet an amount related to such difference.
The arrangement is scheduled to be settled in 2009, subject to
acceleration or early termination in certain circumstances. The
arrangement does not provide the Bank any right to acquire, or
any voting or other ownership rights with respect to, any shares
of TD Ameritrade.
Lillooet is a variable interest entity and the Bank is its primary
beneficiary. Accordingly, the Bank has consolidated Lillooet’s
financial statements in its Consolidated Financial Statements.
As a result of consolidation, TD Ameritrade shares held by
Lillooet have been included in the Bank’s reported investment
in TD Ameritrade and the Bank has also recognized the income
of TD Ameritrade related to the 0.3% of TD Ameritrade shares
owned by Lillooet as at September 30, 2006. At November 15,
2006, Lillooet owned 27 million shares of TD Ameritrade,
representing 4.5% of the outstanding common shares of
TD Ameritrade.
1Projections are based on Institutional Brokers’ Estimate System (IBES)
consensus estimates for the Bank for 2007 and 2008 and assume an April
2007 closing. Projections for TD Banknorth are based on the low-end of
previously disclosed TD Banknorth management guidance for 2007, and
for 2008, a growth rate of 8% on core cash earnings derived from IBES
estimates. Projections are subject to risks and uncertainties that may cause
actual results to materially differ. See the “Caution regarding forward-
looking statements” on page 11 and “Risk Factors That May Affect Future
Results” starting on page 56.