By ALLISSA KLINE
akline@bizjournals.com | 716-541-1612

The wait is over to find out which HSBC Bank USA N.A. branches First Niagara Financial Group Inc. must sell to satisfy federal competition laws.

But the work is far from done as fast-growing First Niagara pushes forward with its latest, and likely most momentous, acquisition.

The Buffalo parent of First Niagara Bank recently announced it must sell 26 of the 195 HSBC Bank branches it plans to acquire as part of the pending $1 billion purchase. The sale of those 26 branches, representing $1.6 billion in deposits, is necessary to comply with U.S. Department of Justice antitrust laws. The branches are located in Erie, Niagara and Orleans counties

Now, according to the head of mergers and acquisitions at First Niagara, the bank must juggle a handful of critical moving parts in order to close the deal during second quarter 2012:

• It must determine which other HSBC Bank branches located outside its desired footprint to market and sell, and then successfully divest those branches. Ideally, First Niagara would like to work with one or two buyers for those branches, which may include those located outside the Interstate-90/Interstate-87 corridors. Some branches may be leased rather than sold, depending on how close they sit to existing First Niagara branches.

• First Niagara has to create a "seamless transition" for customers as it introduces its own products, services and systems to those accustomed to doing business with HSBC Bank. First Niagara officials also must continue to communicate with roughly 1,900 affected HSBC employees, most of whom will be offered jobs with First Niagara or are expected to secure jobs with buyers of the divested branches.

• The bank must raise $750 million to $800 million to support the transaction, a task originally intended to be accomplished through the sale of common stock. But the current state of the marketplace, combined with the decreasing value of First Niagara's stock, means the bank is looking at other instruments to raise capital, including the sale of preferred stock, convertible securities and senior and subordinated debt, the bank has said.

The deal is more complicated than any other recent First Niagara acquisition - mostly because it involves buying part of a franchise, not the entire chain - but Oliver Sommer, executive vice president of corporate development, continues to believe it is a transformative deal for the bank.

"This is very exciting for us, from an organizational perspective," said Sommer, a longtime First Niagara consultant who was hired by the bank in April 2010. "While it's making us a bigger bank, it's also making us a much better bank. We feel like we've been the underdog a little bit in the past. This really gives us distribution presence and customer access."

But some of those who closely watch the financial services industry say the latest purchase may be overpriced, especially now that First Niagara's stock price has fallen nearly 30 percent since the acquisition was announced July 31. For analyst Richard Weiss of Janney Montgomery Scott LLC, the decline suggests that investors "didn't like the deal" because of the risk of stock dilution, but Weiss acknowledges that the market as a whole has suffered in recent months. Still, the bank may get less than it wants for the sale of the divested branches, he said.

"Our particular concern was that acquisitions make sense for First Niagara, but not this one because, to me, what they needed was a bank with more loans rather than more deposits and the premium they're paying is not cheap," Weiss said. "So we questioned if it was a good deal for First Niagara. If the stock price falls, now (the bank) is going to have to raise capital at a lower price and that adds more dilution. Low dilution equals low prices and it turns into a vicious cycle. It's hard to break that."

First Niagara is actively marketing the 26 local HSBC branches, while simultaneously determining which other branches around the state to sell. The exact branches, along with likely buyers of those branches, may be known before the end of the year, Sommer said. He added that the bank does not plan to divest 100 of the 195 branches, as was earlier estimated by bank officials. It still intends to unload a total of $4 billion of the $15 billion in deposits it is acquiring as part of the agreement.

"(Interest) continues to be very high," he said. "There is a healthy mix of banks in our markets certainly looking at the optional divestitures to enhance their presence. This is an opportunity for them to further their strategies."

The internal transition to convert systems and products from HSBC to First Niagara has already begun, but the capital-raising initiative has yet to get under way, he said. The timing depends on market conditions, he said.

In the long run, growth prospects for First Niagara are probably favorable, agreed Weiss and analyst Collyn Gilbert of Stifel Nicolaus & Co. It's also likely the bank will continue to aggressively pursue acquisition opportunities. But Gilbert, who said she doesn't think it will be difficult for the bank to raise capital, wonders if the current $1 billion, all-cash purchase price and 6.7 percent premium on deposits are too high.

"In the (economic) environment, as it stands today with such limited opportunities to invest liquidity, I think so," she said. "I think this was a hefty price to pay in today's market."