writser Posted November 10, 2016 Share Posted November 10, 2016 This is an idea for the small fish out there. First Century Bankshares (FCBS, mcap $46m) is one of the countless US microcap banks currently being gobbled up by one of their competitors. The offeror is Summit Financial (SMMF, mcap $230m). I see deal risk as minimal: small banks like this one are taken over all the time and deals hardly fall through. That's because deals such as this one make sense: microcap banks are too small to exist due to overhead & increased regulations. The offer is at a nice premium but the offeror should be happy too as they can eliminate overhead. Both companies support the deal. SMMF traded up sharply during the 'Trump rally' but FCBS is lagging behind which created an opportunity. Currently you can buy FCBS from the offer @ $23.95 and sell SMMF on the bid @ $21.25. Deal is structured at 35% cash: $22.50 per share and 65% 1.2433 shares of SMMF per share. Value of stock component roughly ~$26.30 (I expect another small SMMF dividend) so total package value is at least ~$25.05. Election forms will be sent out shortly before the special meeting at 6 december so you should still be able to buy FCBS and make a stock election. I (and the company) expect the deal will close around year-end. Spread is around 4.5% (and you can probably improve that if you have some patience with your SMMF executions) which comes down to ~35% annualized. That is way too high for a low-profile small deal that is sensible for both parties. I shorted a little bit of SMMF to lock in my profit but you could also take a free gamble. Maybe one of the reasons this opportunity exists is that it is unattractive for private US investors due to tax issues? Would be appreciated if someone could enlighten me about that. Link to comment Share on other sites More sharing options...
writser Posted November 10, 2016 Author Share Posted November 10, 2016 SMMF spiked up even more today. Spread up to 7%. I verified with my broker and First Century that I should still be able to make a stock election and maxed out my position. Problem is that it takes up quite a bit of margin space and I don't want to be net long 100% because I am skeptical about the sustainability of the SMMF price increase. Maybe some people are confusing the election record date with the deal vote record date. Maybe the market is just inefficient. Or maybe I am missing some key information.. We'll see how things work out :) Link to comment Share on other sites More sharing options...
maybe4less Posted November 10, 2016 Share Posted November 10, 2016 SMMF spiked up even more today. Spread up to 7%. I verified with my broker and First Century that I should still be able to make a stock election and maxed out my position. Problem is that it takes up quite a bit of margin space and I don't want to be net long 100% because I am skeptical about the sustainability of the SMMF price increase. Maybe some people are confusing the election record date with the deal vote record date. Maybe the market is just inefficient. Or maybe I am missing some key information.. We'll see how things work out :) What's this deal point regarding First Century's adj. shareholder equity deviate all about? Link to comment Share on other sites More sharing options...
writser Posted November 10, 2016 Author Share Posted November 10, 2016 Good question. FCBS Book value as per 6/30 was $46m. Projected equity at year end is $47m. Management substracts estimates for all expenses and charges related to the merger to arrive at an adjusted book value of ~$40.9m (so projected costs are about $6m). If costs are more than $7.3m the excess is substracted from the merger consideration, if costs are less than $4.9m the difference is paid out to shareholders. I'm not too worried about this as: 1. The margin for error is quite high: $4.9m or $7.3m in costs is a huge difference for such a small bank - I assume it should be possible to specify costs quite precisely beforehand. 2. If the FCBS cost estimate is way too low they are setting themselves up for lawsuits etc. Management has an incentive to estimate conservatively and 'surprise' shareholders in a positive way. 3. The deal spread in the market provides a buffer: even if they blow away $10m (which I consider highly unlikely, 20% of shareholder equity?!) I still suffer no permanent loss of capital. These are just my thoughts, I could be completely wrong. That said, FCBS moved up intraday and SMMF traded down at the close. Looks like the best opportunity was intraday only. Link to comment Share on other sites More sharing options...
writser Posted November 10, 2016 Author Share Posted November 10, 2016 A reader alerted me to the fact that the above analysis is too simplistic. In fact FCBS merger costs are much lower and estimated to be $850k. I cannot find the exact definition of the 'adjusted shareholder equity' but on page 32 of the SMMF prospectus supplement a 'fair value of FCBS net assets' is given. This number is more or less equal to the adjusted shareholder equity (and the adjustments made are roughly equal to the adjustments described to calculate 'adjusted shareholder equity') so I assume we can take this as a guideline. Apart from the merger costs adjustments are made for intangibles, deferred taxes and mtm valuation. These adjustments could be a bit more volatile than merger costs but still: I don't expect estimates to change much in six months and management has incentives to be a bit conservative. I'm not too worried about this clause. Link to comment Share on other sites More sharing options...
writser Posted December 9, 2016 Author Share Posted December 9, 2016 Merger has been approved but expected closing is now beginning q2 2017. Interesting question is whether the rise in interest rates will affect book value of all these bank deals and thus the merger consideration. Spread has narrowed, deal is taking longer than expected, merger consideration possibly slightly lower -> I don't like this deal as much anymore as I did a few weeks ago. I managed to make some money trading in & out (shouldn't have hedged!). Link to comment Share on other sites More sharing options...
writser Posted January 4, 2017 Author Share Posted January 4, 2017 Last few days there was decent volume at a >8% discount, some large offers every now and then. Deal should close in a few months for an excellent IRR. I bought some shares again. Link to comment Share on other sites More sharing options...
redhots Posted January 5, 2017 Share Posted January 5, 2017 If I purchase now, how can I be assured I can make the stock selection? Is it too late? Link to comment Share on other sites More sharing options...
writser Posted January 9, 2017 Author Share Posted January 9, 2017 You should contact your broker about their specific election deadline. AFAIK election forms haven't been sent out yet and after that you have another 15 days. Should still be possible but don't trust me :) SA article with some more info about the deal: http://seekingalpha.com/article/4035070-microcap-bank-merger-attractive-smaller-investors Link to comment Share on other sites More sharing options...
writser Posted April 5, 2017 Author Share Posted April 5, 2017 Deal closed. Link to comment Share on other sites More sharing options...
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