A SunTrust Shift?
By Peralte C. Paul, The Atlanta Journal-Constitution
Feb. 2–SunTrust Banks Inc.’s nearly century-old relationship with Coca-Cola Co. is akin to a once-hot marriage that has lost its spice.
Some SunTrust investors and analysts have demanded in recent years that the two venerable Atlanta-based institutions call it quits. A split had seemed far-fetched until the bank’s disclosure last week of a relatively small charitable donation.
The reason? The gift was in Coke stock.
SunTrust’s critics have targeted the bank’s $2.3 billion of Coke shares that it began amassing in 1919 when it underwrote the soft drink company’s initial public offering. Coke shares have lagged in recent years, and investors said SunTrust should sell the stock to free money for other initiatives that would boost the bottom line.
SunTrust executives have said they weren’t opposed to selling Coke shares if a way could be found to minimize the huge tax hit on such transactions, but questions lingered whether the holdings were a sacred cow.
That’s why longtime skeptics took note when SunTrust officials told analysts last week the bank had donated about $4 million of the Coke shares to one of its charitable foundations — and declared it might do more of the same in the future.
“Four or five months ago they indicated to me that they weren’t going to sell it,” said Richard X. Bove, an analyst at Punk Ziegel & Co. “It’s a total surprise.”
That sentiment was widespread despite SunTrust Chairman L. Phillip Humann’s declaration in September at an investor conference that the bank had not ruled out selling the shares.
Through stock splits and price appreciation, the shares now number 48.2 million with a market value of more than $2.31 billion based on Thursday’s closing share price. (SunTrust also holds another 51 million or so shares in trust for investors under management, making it the beverage giant’s second-largest investor and its total Coke portfolio worth more than $4.76 billion.)
Selling the stock would incur some hefty capital gains taxes because the shares have appreciated tremendously since SunTrust acquired them.
Nonetheless, SunTrust executives have hinted in the past that nothing is off-limits.
“Everything is on the table, including shares of Coke that we have owned since 1919,” Humann said at the September conference.
Still, SunTrust officials cautioned that Wall Street shouldn’t read too much into one donation.
“It is what it is,” SunTrust spokesman Barry Koling said.
The money generated from the donation to SunTrust’s Mid Atlantic Foundation in Richmond will go toward funding the bank’s favorite causes including children’s charities, health care research, the arts and education, he said.
The stock donation is advantageous taxwise because SunTrust is relieved of any capital gains tax burden since it’s a charitable contribution.
“What this is is what we said it was,” Koling said. “It’s a tax-advantageous way to fund one of our foundations through which we make charitable and public service contributions.”
In other words, SunTrust isn’t on anyone else’s timetable when it comes to its Coke holdings.
Still, some analysts see the gesture as a step in the right direction, even though they view it as a token gesture.
“I think it’s a big deal symbolically,” said Christopher W. Marinac, a banking analyst with FIG Partners. If SunTrust truly wanted to make a bold statement about becoming unwedded to Coke, the company would have to part with at least 20 percent of its holdings in the beverage giant, Marinac estimates.
He agreed the gesture was a way to take advantage of a corporate tax benefit.
“I think it’s a way for them to kill two birds with one stone,” he said. “They fund their foundation — it’s hard to claim to be a community partner when you don’t donate money or participate in the community — but at the same time you create tax benefits for doing it. The irony is that they could be a great corporate steward if they did more of that.”
Dana Bolden, a Coke spokesman, said the company would have no comment on the matter.
Bove said SunTrust’s tie to Coke doesn’t make much sense outside of history.
“There seems to be a major emotional attachment at the bank to the stock because they simply refuse to sell it,” he said.
During the 1980s and for most of the ’90s, SunTrust’s hard stance on Coke made sense.
The stock had a fantastic run, fizzing ever higher from the mid-$30s range in 1980 to the $60 range by the end of 1997. In turn, that buoyed SunTrust’s own shares, making them more valuable.
But Coke shares have given up much of those gains since then, trading in the low-$40s range for much of this decade.
“The return on equity is simply too low because Coke doesn’t go up anymore,” Bove said, arguing for a SunTrust divorce from Coke. “Having this much investment concentrated in anyone is not prudent for any bank.”
SunTrust’s shares, meanwhile, have risen over that period, and the bank itself has become a much bigger institution, making its Coke holdings less of a factor, Marinac said.
“Most analysts felt the Coke stock should’ve been sold long ago, but we also realize that there are deeper ties between Coke and SunTrust that are stronger than what analysts think,” Marinac said.
Financial ties that bind SunTrust’s predecessor bank, Trust Company of Georgia, underwrote Coke’s 1919 initial public offering. Ernest Woodruff was president of Trust Company at the time. Four years later, his son, Robert, was named president of Coke, and the Woodruff family maintained significant holdings in both companies.
Today, there are several connections between the two companies’ boards of directors.
James B. Williams, SunTrust’s former chairman and chief executive, sits on Coke’s board.
Neville Isdell, Coke’s current chairman and chief executive, sits on SunTrust’s board, as does M. Douglas Ivester, a retired chairman and CEO of Coke.
But Marinac notes that Emory University hasn’t had an issue with selling some of its Coke holdings.
Like SunTrust, Emory has had long-held ties to Coke. The university campus sits atop land donated by Coke founder Asa Candler. In 1979, Coke mogul Robert Woodruff and his brother donated $105 million in Coke stock to Emory. And Emory’s business school is named for Roberto C. Goizueta, the late Coke chairman who guided the company toward becoming a global force.
“Emory doesn’t have any problems selling Coke stock. Why should SunTrust?” Marinac said.
SunTrust officials say they are studying every option with the Coke holdings but haven’t announced, much less committed to, any one strategy.
“We have said consistently that we regularly look at that and a way to maximize that asset from a shareholder point of view,” SunTrust’s Koling said.
But outside observers shouldn’t take one action as an indication of some grander scheme, he said.
“It was a decision made by management. It is part of the ongoing process by which we take a look at what we’re doing to see if there are opportunities where we can operate more efficiently and in the shareholders’ financial interest.”
Still, Bove, who said SunTrust could mitigate the capital gains issues by perhaps issuing convertible bonds or taking other tax-saving steps, stressed the bank needs to drop a stock that’s not helping its own bottom line anymore.
What’s more, the bank, which said it plans to save some $400 million in costs by the end of 2009, has some pressing issues that need attention, Bove said.
“SunTrust is under significant pressure. The company has cost issues, massive changes in management, succession problems,” Bove said, rattling off a list of things that need fixing.
“They are overcommitted to the stock, which I think is bad.”
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