Regions' TARP bill could lead to low-ball bid on MK

It stands to reason that large shareholders have been selling shares in Regions Financial Corp. The stock is down nearly 50% this year. It turns out the bank's largest shareholder — Bruce Berkowitz of Fairholme Capital Management — unloaded half his 123.9 million shares in Regions over the last quarter, undoing part of his enormous bet on the financial services sector this year. Regions is one of the last large-cap banks to still owe Troubled Asset Relief Program money and they have clearly indicated that paying back the government is a priority. The sale of brokerage Morgan Keegan is a central part of the plan to do so. "The longer [the TARP situation] lingers, the worse it looks," said Marty Mosby, an analyst with Guggenheim Securities. There is no deadline to repay the $3.5 billion in government money, but while the cash is still owed, Regions must pay 5% interest on the preferred securities held by the U.S. government. And toward the end of next year, the coupon bumps up to 9%. That's not exactly cheap financing, particularly considering what interest rates are like right now. In a presentation last month, Grayson Hall, Regions president and CEO, said "our position on TARP repayment remains unchanged. Our preference continues to be to execute in as shareholder friendly a manner as possible, remaining both patient and prudent in that regard." But given the markets and Region's stock price this year, Mr. Mosby suspects they will now have to wait until late 2012 or 2013 to pay back the government. And that is predicated on improvements in the economy and the markets. Thus the sale of Morgan Keegan looks all the more important with Regions' stock price in the tank. But if the bank isn't a distressed seller, it is clearly negotiating from a weakened position. And private-equity firms, now looking like the most likely buyers of the firm, prey on weakness. More than likely, they are pushing the bank to unload the brokerage for significantly less than one times revenue (approximately $1 billion, according to Mr. Mosby). If Regions really wants to get out from under the TARP label, it may have to accept a low-ball bid.