First Interstate Is Interested in Texas Bank : Merger With Ailing Allied Bancshares Could Be Worth $600 million

First Interstate Bancorp, back on the acquisition trail following its aborted bid for BankAmerica, is engaged in preliminary merger discussions with Allied Bancshares of Houston, the Texas firm said Thursday.

The deal, if consummated, could be worth as much as $600 million, analysts said, making it one of the nation’s largest banking mergers and easily the largest for Los Angeles-based First Interstate, whose vast network already includes 23 banks in 12 states.

The deal also would be the second major foray by a large out-of-state bank into Texas since the state passed legislation last September allowing interstate link-ups to help bail out the troubled Texas banking system. The first such deal was Chemical New York Corp.’s $1.19-billion purchase of Texas Commerce Bancshares, completed May 1.

An acquisition of Allied would mark First Interstate’s initial venture in Texas, a market that has been battered in recent months by slumps in energy and real estate but nonetheless is seen as lucrative, given its status as the nation’s third-largest banking market behind California and New York.

Called a Likely Choice

“It’s a natural extension of our territory,” First Interstate spokesman Paul Minch said, noting that the firm owns or has franchised banks in Oklahoma, New Mexico and Louisiana.

Allied--Texas’ sixth-largest bank holding company and the nation’s 53rd-largest at the end of 1986--is attractive as a takeover candidate partly because it is weathering the Texas downturn better than many of its competitors, having remained profitable until last year, when it posted its first loss ever.

The Houston firm has suffered relatively smaller losses than its rivals thanks in part to a proportionately lower exposure to energy loans. Most of Allied’s problems are in real estate loans and, although Southwest real estate values are depressed, they tend to incur smaller losses than energy loans.

First Interstate also sees Allied as attractive because of its strong lending to small- and medium-sized businesses, its large retail bank network concentrated mainly in eastern Texas, and its respected management team, which would be expected to be retained by First Interstate, analysts said.

“Allied is a good bank with a good historical record that has come on hard times in that difficult environment in Texas,” said Donald K. Crowley, a senior vice president at the San Francisco office of Keefe, Bruyette & Woods Inc., a firm specializing in bank securities. “They (First Interstate) would be getting a good company.”

Felice M. Gelman, bank analyst at Fox-Pitt Kelton, a New York securities firm, said: “If the Texas economy recovers, they (Allied) have the potential to do very well. The real problem for First Interstate is what happens in the meantime and how much protection they will have in absorbing Allied’s asset problems.”

First Interstate is not without its own difficulties. Although the firm’s overall profits are strong, its problem loans have been growing and some of its smaller banks in the Rocky Mountain states are suffering weak earnings due to slumps in energy and other economic sectors.

Because of the potential risks in the First Interstate-Allied deal, its consummation hinges on price and structure, analysts said. They suggested that the deal likely would be structured in a similar manner to the Chemical-Texas Commerce merger, under which Chemical is paying cash plus securities, with values tied to Texas Commerce’s future earnings.

A similar deal would partially cushion First Interstate from potential risk while also allowing Allied shareholders to benefit if the Texas bank’s performance improves.

Analysts suggested that the value of the deal would be likely to fall within a range around Allied’s book value--or net asset value--of $14.29 per share. With 41.5 million shares outstanding, that would put Allied’s value at just under $600 million.

First Interstate has made it known for months that it was interested in entering Texas. The interest escalated after February, when it dropped its $3.2-billion bid to acquire BankAmerica, analysts said. First Interstate spokesman Minch said talks with Allied have been underway for weeks, but both companies said no formal agreements have been reached.

Allied’s announcement of the merger talks was triggered by unusually heavy activity in Allied stock Wednesday and Thursday, apparently due to takeover speculation, said Jay C. Crager Jr., Allied’s executive vice president and chief financial officer.

Speculation sent Allied’s stock up as much as $2.125 per share in early national over-the-counter trading Thursday before the talks were disclosed. It closed Thursday up $1.875, at $11 per share. First Interstate’s stock tumbled $1.125 per share to close at $54.25 in New York Stock Exchange trading.

While large, a First Interstate-Allied merger would rank behind several others besides the Chemical-Texas Commerce transaction. They include the proposed $1.1-billion purchase of Rainier Bancorporation by Security Pacific Corp., the $1.1-billion acquisition of Crocker National by Wells Fargo & Co. and the $800-million merger of RepublicBank Corp. and InterFirst Corp.

Consummation of the First Interstate-Allied deal is likely to thrust the Los Angeles firm from its current position as the nation’s ninth-largest bank holding company into the eighth spot, ahead of Bankers Trust New York Corp. but still behind Chemical and local rival Security Pacific, assuming that Security’s purchase of Rainier is completed.

ALLIED BANCSHARES AT A GLANCE (As of end of first quarter, except where noted)Assets: $9.2 billion Deposits: $7.6 billion Bank holdings: Owns 51 banks in Texas (21 are merging into one bank) Employees: 3,300 Net loss for 1986: $17.6 million Book value per share: $14.29 FIRST INTERSTATE BANCORP AT A GLANCE (As of end of first quarter, except where noted) Assets: $52.1 billion Deposits: $37.4 billion Bank holdings: Owns 23 banks in 12 states, franchises another 43 banks in 11 states Employees: 36,500 Net profit for 1986: $337.9 million Book value per share: $59.77