Heartland will also sell $56 million of subordinated debt that will be eligible as tier 2 capital.
The deal, that Heartland is calling a merger, involves the listed group buying all of TSB’s shares from current owner, Toi Foundation, which will become a 17.5% shareholder of Heartland.
Heartland said the merger is “recognising each bank’s long history and deep connection to regional New Zealand.”
The merged entity will be called TSB Heartland Bank and it will be “a challenger bank of scale with a regional focus, increasing banking competition and choice for New Zealanders.
The Toi Foundation is a community trust and it says it will be seeking feedback on the deal from Taranaki residents who live within the foundation’s legislated boundary. The deal also requires approval from Heartland’s shareholders.
“No decisions have been made. Community feedback will play an important role in informing Toi Foundation Trustees before any final decision is taken,” Toi said on its website.
Heartland said combining forces will create “a full-service-capable bank differentiated by its specialist product offerings with a lower risk-weighted product portfolio.”
Heartland said the merger will combine its specialist product expertise – it sells reverse mortgages in Australia and New Zealand, motor financing and commercial lending including livestock funding – with TSB’s “cost-effective funding platform and transactional banking capabilities.”
The deal will see Heartland pay Toi $620 million in cash and to issue Toi with $250 million worth of new shares in Heartland priced at $1.25 per share, a 14.6% premium to Heartland’s 10-day volume weighted average share price on NZX of $1.09 ahead of the announcement.
The two-year vendor loan Toi will provide can be refinanced by Heartland at any time without break fees.
The two organisations expect the merger will be completed by December with Toi’s consultation taking place in June and July, due diligence being completed in June, warranty and indemnity insurance obtained in June and a meeting of Heartland shareholders in August.
The deal also needs regulatory approvals in NZ and Australia.
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