Royal Bank buys City National in push to expand wealth business

Royal Bank of Canada agreed to buy City National Corp., the Los Angeles-based banker to the stars, for about $5.4 billion in its biggest takeover ever to expand sales to wealthy U.S. residents.
Royal Bank will pay about $93.80 per share in cash and stock for City National, or 26% more than yesterday’s closing price, the Toronto-based lender said Thursday in a statement. Canada’s second-biggest lender by assets will pay about $47.25 in cash and 0.7489 of a share for each of City National’s shares.
The takeover marks an expansion into U.S. private and commercial banking under David McKay, who took over as chief executive officer in August. International investors are the most bullish on the U.S. market in more than five years as America is seen as a bright spot in an otherwise worsening global economy, the latest Bloomberg poll found.
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The City National deal fuels expansion in a “country which we view as our second home market,” Mr. McKay, said in the statement. “City National serves high-net-worth and commercial-client segments in select high-growth markets, and represents a unique opportunity to complement and enhance our existing U.S. businesses.”
FRANK SINATRA
City National, founded in 1954, has long focused on a show-business clientele. It provided a $100,000 loan to Frank Sinatra when he needed to pay a ransom after his son was kidnapped in 1963. The bank also lent $4.5 million to Arnold Schwarzenegger to fund his first California gubernatorial campaign in 2003.
The lender first made inroads into New York about a decade ago with five people in an upstairs Midtown office, CEO Russell Goldsmith said in a 2013 interview with Bloomberg News. The bank set its sights on Broadway, and while it doesn’t finance productions, it has provided payroll and cash-management services for shows such as “Book of Mormon” and the recent revival of “Cat on a Hot Tin Roof,” he said.
City National expanded earlier in the decade to Atlanta and Nashville to target music producers, talent agencies and law firms, and opened street-level branches in New York to gain visibility in a city where many of its Hollywood clients work and live.
Royal Bank fell 2.3% to C$74.86 Thursday morning in Toronto, while City National climbed 19% to $88.54 in New York.
City National on Thursday reported net income of $255.8 million in 2014, up 11% from a year earlier. The bank has $32.6 billion of total assets, with record loan balances of $20 billion. Mr. Goldsmith will remain as CEO, reporting to Mr. McKay, and the firm’s headquarters will stay in Los Angeles, Mr. McKay said on a conference call. The business will fall under Royal Bank’s wealth-management division.
Royal Bank executives have said they wouldn’t return to traditional bricks-and-mortar retail banking in the U.S. after they sold its money-losing North Carolina-based RBC Bank in 2005, though left open the possibility of expanding its wealth-management business there. Mr. McKay said he first approached Goldsmith in 2013, and the deal has been two years in the making.
‘SOLID FRANCHISE’
City National “is a solid franchise that will deepen Royal Bank’s penetration in U.S. wealth management and broaden its geographic exposure, particularly in California,” John Aiken, an analyst with Barclays Plc, said in a note to clients. “We do not believe that the price paid by Royal is onerous.”
Royal Bank spent more than $4.6 billion over a decade trying to make inroads in U.S. retail banking starting with its 2001 purchase of Centura Bank. The firm cut its losses in March 2012 when it sold RBC Bank and credit-card assets to PNC Financial Services Group Inc. for $3.62 billion.
Royal Bank had about 7,800 employees in the U.S., where it operates an investment bank and wealth management business. U.S. workers account for about 11% of its total workforce, according to financial statements.
Canadian lenders have been expanding in the U.S. through acquisitions. Bank of Montreal agreed to buy Wisconsin’s biggest bank for $4.1 billion in 2010, and Toronto-Dominion Bank spent about $17 billion building a branch network from Maine to Florida starting with its 2005 purchase of a 51% stake in Portland, Maine-based Banknorth Group Inc.
RBC Capital Markets and JPMorgan Chase & Co. were financial advisers for Royal Bank, while Bank of America Corp. and Sandler O’Neill & Partners LP advised City National. Sullivan & Cromwell and Osler Hoskin & Harcourt were legal advisers for Royal Bank, and Wachtell Lipton Rosen & Katz advised City National.