Hoped-For White Knights Are Ignoring a Dime in Distress

There must be something up with the white knight's horse.

Why else hasn't Dime's (DME) defender already arrived, brandishing a war chest of cash, to buy up the New York thrift and save it from the rude advances of Long Island's North Fork Bank (NFB)?

It's now a whole week since Dime called off its proposed friendly merger with Hudson United (HU). It was forced to do this after a hostile -- but more attractively priced -- counterbid from North Fork emerged in early March.

Wishful Thinking

When the Hudson deal was pronounced dead on April 28, Dime said the thrift would explore "all strategic alternatives." Its chief executive, Lawrence Toal, told Newsday on the same day that North Fork's offer wasn't attractive and added: "We think there's a better alternative." But that blatant appeal for a white knight hasn't spurred any move from the banks mentioned as potential acquirers by Dime shareholders, who believe North Fork's offer can be improved upon. Dime's stance hasn't become any less defiant: In a filing with the Securities and Exchange Commission Thursday, North Fork says that its May 2 request to meet Dime officials was turned down.

The three institutions most talked about are Holland's ABN Amro (ABN) , through its New York subsidiary EAB; the U.K.'s HSBC (HBC), which recently bought Republic New York; and Citigroup (C). All three banks declined to comment, citing policies of not commenting on acquisition rumors.

But the longer the wait, the more likely North Fork's offer is to succeed. Hopes that Dime will sell for a lot more than North Fork is offering -- $16.88 at Thursday's closing price -- will be dashed.

When asked if there really is a white knight, John Kanas, North Fork's chief executive, chairman and president, said: "Quite frankly, I don't think there is another bid. The only talk has come from shareholders who are trying to wish it so."

North Fork wants Dime, which has $24.2 billion in assets, and $14.2 billion in deposits, to continue its own push into the lucrative metropolitan New York market. It's offering 0.9302 North Fork shares plus $2 in cash for Dime.

Kanas says he'd be willing to increase his offer if Dime can "give us comfort" that it can earn more than $2.60 per share in 2001. Analysts surveyed by First Call/Thomson Financial believe that Dime is set to make $2.37 this year and $2.59 next. Dime's public relations firm, New York-based Abernathy MacGregor, declined to give on-the-record comment beyond the thrift's April 28 press release, and Toal didn't comment.

The Smart Money

The market is still betting against Kanas' current offer. The premium of Dime's share price to North Fork's offer price has increased, to 11% Thursday from 8.1% a week earlier.

But how likely is it that other banks will pile in? ABN Amro may want to add to its operations in the American Midwest. But one ABN Amro analyst thinks the Dutch giant wants to stay concentrated on that region and isn't keen to expand the EAB subsidiary. "Quite honestly, I'd expect EAB to be sold," says Mark Hoge, European banks analyst at Donaldson Lufkin & Jenrette in London, which rates ABN Amro a market perform and hasn't done any recent underwriting for ABN Amro.

HSBC might want Dime to add to the presence it gained through the old Republic, according to Sunil Garg, banks analyst at Fox Pitt Kelton in London. "It would also allow them to take some costs out," says Garg, who gives HSBC a neutral rating; his firm hasn't done recent underwriting for the bank. However, it's possible that, due to its recent purchase of Republic, regulators may object to HSBC further building up in the New York area.

Shareholder Values

Dime shareholders are adamant that North Fork's bid is too low. Jeff Miller, a manager of the Villanova, Pa.-based Acadia financial services hedge fund, believes Dime should sell for around $24 to $25 per share, because that's equivalent to around 10 times projected 2000 and 2001 earnings. Miller would rather get all cash for his Dime shares than North Fork shares plus $2. That's because he feels North Fork's stock -- trading around three times book value -- is pricey. (Miller's fund is long Dime and North Fork.)

But with the Fed's interest-rate stance getting uncomfortably tough, investors don't have too much faith in thrifts' earning power. This can be seen in the lackluster valuations on thrifts -- even on those that are doing better than Dime.

Cleveland-based Charter One (CF) trades at 8.5 times forecast 2000 earnings, slightly dearer than Dime's 7.9 times. Yet First Call-surveyed analysts expect Charter One to achieve 19% earnings growth this year, which is more than double Dime's expected 9.2% growth.

If a proven sector leader is not getting the market's backing, then one has to ask how sensible it is to pay more for Dime. Maybe the white knights are mulling the same question.

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