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