CKTM - Commerce Bank of Temecula Valley Merger Arbitrage

[Foreign Tuffett]

Commerce Bank of Temecula Valley (CKTM - note that like many tiny banks, they do not file with thr SEC) is being acquired by Nano Financial for $14.41 per share, with the transaction scheduled to close in mid-2018. CKTM is trading at $13.40, which I view to be an overly large discount to the deal price, given the strong probability that the transaction occurs. If the acquisition closes as scheduled, the IRR will be around 15% assuming a 6 month holding period.

 

Here's why I think this is a good investment idea:

 

1) Enrique Schon owns ~34% of CKTM's outstanding shares. He is on the board, as are his son and daughter.

 

http://www.northbaybusinessjournal.com/industrynews/7220615-181/shareholders-in-april-killed-the

 

2) In 9/2016 CKTM announced it was selling itself to AltaPacific bank. However, in 4/2017 CKTM's shareholders voted down the acquisition, causing the transaction to fall apart.

 

https://www.apbconnect.com/altapacific-bancorp-and-commerce-bank-temecula-valley-sign-definitive-agreement-merge

 

https://www.businesswire.com/news/home/20170417005981/en/AltaPacific-Bancorp-Terminates-Merger-Agreement

 

3) The reason the attempt to sell the company to AltaPacific failed is that Schon opposed it. Obviously it's tough to win a vote like this when a board member who owns such a large chunk of the company is opposed.

 

http://www.northbaybusinessjournal.com/northbay/sonomacounty/6758724-181/sonoma-altapacific-bank-merger-growth

 

4) Donald W. Murray, Chairman and CEO of CKTM, leaves the bank in the aftermath of the failed sale. His replacement, Scott R. Andrews, is appointed in 9/2017.

 

https://www.businesswire.com/news/home/20170915005181/en/Commerce-Bank-Temecula-Valley-Appoints-Scott-R.

 

5) At the end of last year the sale to Nano Financial is announced. Note that it's at a much higher deal price than the the AltaPacific deal ($23.3 million vs. $15.9 million). The press release states that "The offer to purchase received unanimous approval from Commerce Bank of Temecula Valley’s board of directors." The 1/3/2018 CKTM press release features similar language. This means Schon approves of this transaction and will (almost certainly) vote his shares accordingly.

 

https://www.businesswire.com/news/home/20171229005421/en/Nano-Financial-Holdings-Acquire-Commercial-Bank-Southern

 

https://www.businesswire.com/news/home/20180103006261/en/Commerce-Bank-Temecula-Valley-Shareholder-Letter

 

5) Note that two other members of the board are "founding shareholders." They probably both own significant amounts of shares. It wouldn't surprise me if the board, in total, owns an outright majority of outstanding shares. With a higher deal price and the board unanimous in support, I think the shareholder vote is going to be little more than a formality. Also, I can't think of any obvious reason(s) why CKTM shareholders would oppose the sale.

 

https://www.commercebanktv.com/aboutus.asp

 

6) Nano Financial Holdings has "raised more than $60 million in stock subscriptions." So Nano should have the cash to complete the transaction. Also, here's how Nano describes itself: "Nano Financial Holdings, Inc. is an unlisted special purpose acquisition company that was formed to acquire one or more commercial banks in California. The company was founded in 2017 and is based in Irvine, California." Nano needs to own a bank in CA to execute its strategy. If this acquisition doesn't close Nano is back to square one, and will have to hunt for another CA bank to acquire.

 

https://marketintelligence.spglobal.com/our-thinking/news/nano-financial-to-offer-security-that-community-banks-dont-typically-provide

 

7) Re the shares vs. cash at acquisition close issue that I think is partly responsible for the gap between market price and deal price: I think minority outside shareholders will get cash. From the 1/3/18 CKTM press release (linked to above): "Under the terms of the agreement, CBTV shareholders will have the right to receive $14.41 per share in cash." I think the "certain accredited CBTV shareholders agree to exchange a portion of their CBTV shares of common stock for newly issued shares of Nano Class A Common Stock" language in the release is referring to certain insiders and large shareholders like Schon. Non-accredited outside shareholders who own a small blocks of stock shouldn't fall under language like this. Also, Nano Financial is a privately owned SPAC-type entity that only accredited investors can own. Small private investors almost certainly aren’t eligible to own it under SEC rules, which should preclude shares in it being transferred indiscriminately to CKTM shareholders.

 

 

 

 

 

[oddballstocks]

Commerce Bank of Temecula Valley (CKTM - note that like many tiny banks, they do not file with thr SEC) is being acquired by Nano Financial for $14.41 per share, with the transaction scheduled to close in mid-2018. CKTM is trading at $13.40, which I view to be an overly large discount to the deal price, given the strong probability that the transaction occurs. If the acquisition closes as scheduled, the IRR will be around 15% assuming a 6 month holding period.

 

Here's why I think this is a good investment idea:

 

1) Enrique Schon owns ~34% of CKTM's outstanding shares. He is on the board, as are his son and daughter.

 

http://www.northbaybusinessjournal.com/industrynews/7220615-181/shareholders-in-april-killed-the

 

2) In 9/2016 CKTM announced it was selling itself to AltaPacific bank. However, in 4/2017 CKTM's shareholders voted down the acquisition, causing the transaction to fall apart.

 

https://www.apbconnect.com/altapacific-bancorp-and-commerce-bank-temecula-valley-sign-definitive-agreement-merge

 

https://www.businesswire.com/news/home/20170417005981/en/AltaPacific-Bancorp-Terminates-Merger-Agreement

 

3) The reason the attempt to sell the company to AltaPacific failed is that Schon opposed it. Obviously it's tough to win a vote like this when a board member who owns such a large chunk of the company is opposed.

 

http://www.northbaybusinessjournal.com/northbay/sonomacounty/6758724-181/sonoma-altapacific-bank-merger-growth

 

4) Donald W. Murray, Chairman and CEO of CKTM, leaves the bank in the aftermath of the failed sale. His replacement, Scott R. Andrews, is appointed in 9/2017.

 

https://www.businesswire.com/news/home/20170915005181/en/Commerce-Bank-Temecula-Valley-Appoints-Scott-R.

 

5) At the end of last year the sale to Nano Financial is announced. Note that it's at a much higher deal price than the the AltaPacific deal ($23.3 million vs. $15.9 million). The press release states that "The offer to purchase received unanimous approval from Commerce Bank of Temecula Valley’s board of directors." The 1/3/2018 CKTM press release features similar language. This means Schon approves of this transaction and will (almost certainly) vote his shares accordingly.

 

https://www.businesswire.com/news/home/20171229005421/en/Nano-Financial-Holdings-Acquire-Commercial-Bank-Southern

 

https://www.businesswire.com/news/home/20180103006261/en/Commerce-Bank-Temecula-Valley-Shareholder-Letter

 

5) Note that two other members of the board are "founding shareholders." They probably both own significant amounts of shares. It wouldn't surprise me if the board, in total, owns an outright majority of outstanding shares. With a higher deal price and the board unanimous in support, I think the shareholder vote is going to be little more than a formality. Also, I can't think of any obvious reason(s) why CKTM shareholders would oppose the sale.

 

https://www.commercebanktv.com/aboutus.asp

 

6) Nano Financial Holdings has "raised more than $60 million in stock subscriptions." So Nano should have the cash to complete the transaction. Also, here's how Nano describes itself: "Nano Financial Holdings, Inc. is an unlisted special purpose acquisition company that was formed to acquire one or more commercial banks in California. The company was founded in 2017 and is based in Irvine, California." Nano needs to own a bank in CA to execute its strategy. If this acquisition doesn't close Nano is back to square one, and will have to hunt for another CA bank to acquire.

 

https://marketintelligence.spglobal.com/our-thinking/news/nano-financial-to-offer-security-that-community-banks-dont-typically-provide

 

7) Re the shares vs. cash at acquisition close issue that I think is partly responsible for the gap between market price and deal price: I think minority outside shareholders will get cash. From the 1/3/18 CKTM press release (linked to above): "Under the terms of the agreement, CBTV shareholders will have the right to receive $14.41 per share in cash." I think the "certain accredited CBTV shareholders agree to exchange a portion of their CBTV shares of common stock for newly issued shares of Nano Class A Common Stock" language in the release is referring to certain insiders and large shareholders like Schon. Non-accredited outside shareholders who own a small blocks of stock shouldn't fall under language like this. Also, Nano Financial is a privately owned SPAC-type entity that only accredited investors can own. Small private investors almost certainly aren’t eligible to own it under SEC rules, which should preclude shares in it being transferred indiscriminately to CKTM shareholders.

 

Thanks for the heads up on this one, picked up some shares.

 

Two options here:

1) Scalp the ~$1 per share. Make a little cash.

2) Receive Nano Financial shares and enjoy the ride.

 

I need to dig into Nano a bit, but the formula they're going to follow here is clear.  Buy three under performing banks for about $20m each, combine them, reduce costs and create a much more valuable financial service company.

 

Typically what happens is you buy these small banks, grow them to a few hundred million in assets apiece then sell away.

 

If the people running Nano have done this before then the $60m they're raising now will probably become $150m or $200m in an eventual sale.

 

I'm trying to find the names of the people doing this.  If you take stock in Nano then maybe Nano will get the ticker from this?

[JayGatsby]

Well researched, Foreign Tuffett. I own a few shares of this. I agree it seems like a very high likelihood.

[TBW]

Really interesting idea!  Thanks.

 

CKTM seems well managed, with very cheap deposit base but under scaled and under leveraged.  Makes sense as a target.  Price paid of 1.7x book is high, but looks like the buyers sold California Republic for ~2x book (my guesstimate from limited info).  So they likely think they can add more value.  They also have the cash and need to start investing.

 

My only question is what would break up this deal?  Schon changes his mind, something comes up in the due diligence, any other reasons?

 

On breakup this likely trades back to book value.  That's not too bad.

[landstander]

Meeting to vote on the merger has been scheduled for April 12th. Seems to me that everything is moving along with the board unanimously recommending shareholders vote for the merger.

 

With regard to whether shareholders will receive $14.41 or Nano shares, I believe this confirms minority share holders will be the ones receiving cash -

...four shareholders have agreed to enter into exchange and subscription agreements with respect to 419,010 shares of Commerce Bank common stock or 26% of the outstanding shares of Commerce Bank.

 

Thanks for the idea Foreign Tuffett!

 

https://www.commercebanktv.com/CBTV_ProxyStatement2018.pdf

[siddharth18]

Looks like it's expected to close tomorrow? No trading or bids today. Description at TDAmeritrade shows:

 

 

[Hielko]

Means the merger has closed already, and payment is on it's way. Possible tomorrow, but could take a bit longer as well.

[Guest Schwab711]

Great post and thanks for the idea, FT!

[snow pea]

Yes, many thanks! 

[chesko182]

many thanks, this was probably one of the quickest investment decisions I took. A nice cash parking spot...

 

saludos

[Hielko]

https://www.businesswire.com/news/home/20180501006987/en/Acquisition-Commerce-Bank-Temecula-Valley-Completed

[writser]

I didn't post anything in this topic because I'm skeptical of the added value of sharing an illiquid merger on a public forum. Nevertheless this was one of my largest positions during the start of the year. I bought a bunch in January around $13.35 and bought more in March around $13.45 when I had more buying power because some other special situations played out. A 7.5% return in a few weeks is insane - I think this was severely mispriced (though I realize that is easy to say after the deal has closed). Maybe a large shareholders wanted to cash out some shares instead of receiving illiquid shares in Nano financial? Not sure who was selling.

 

This deal ticked a lot of boxes I like:

 

- A timeline was provided.

- Founders / large shareholders were on board, the vote was basically a formality.

- Lack of liquidity means that this was almost only interesting to retail investors and maybe some small ball funds. Not much competition - it wasn't too hard to pick up some shares on the bid at very attractive prices.

- The lack of liquidity, a lack of detailed information, CKTM being an OTC stock, the uncertainty about the deal price possibly being adjusted, the uncertainty regarding certain investors receiving shares instead of cash and a previous deal failing were possible causes for a mispricing (though I didn't think these were serious issues).

- Company management was nice and helpful.

- Downside was somewhat protected - the deal was at a juicy premium but the underlying bank looked solid and was a takeover target before.

- As far as I know regulators aren't really interested in investigating a microcap banking deal.

- During the first weeks of the year all information that was available was one press release and one shareholder letter. I like these situations where there is limited information, no news for weeks and some uncertainty. Easy to analyse and make a decision - I don't mind reading two press releases and buying this at a 8% discount while waiting for a proxy but apparently others do.

 

Absolute no-brainer as far as I was concerned - within 15 minutes it was obvious that I was going to buy it - the only thing I had to think about was position sizing.

[zippy1]

Really appreciate that you share this idea!

[Foreign Tuffett]

Really appreciate that you share this idea!

 

Thank you. Glad it worked out for everyone.

[fishwithwings]

I didn't post anything in this topic because I'm skeptical of the added value of sharing an illiquid merger on a public forum. Nevertheless this was one of my largest positions during the start of the year. I bought a bunch in January around $13.35 and bought more in March around $13.45 when I had more buying power because some other special situations played out. A 7.5% return in a few weeks is insane - I think this was severely mispriced (though I realize that is easy to say after the deal has closed). Maybe a large shareholders wanted to cash out some shares instead of receiving illiquid shares in Nano financial? Not sure who was selling.

 

This deal ticked a lot of boxes I like:

 

- A timeline was provided.

- Founders / large shareholders were on board, the vote was basically a formality.

- Lack of liquidity means that this was almost only interesting to retail investors and maybe some small ball funds. Not much competition - it wasn't too hard to pick up some shares on the bid at very attractive prices.

- The lack of liquidity, a lack of detailed information, CKTM being an OTC stock, the uncertainty about the deal price possibly being adjusted, the uncertainty regarding certain investors receiving shares instead of cash and a previous deal failing were possible causes for a mispricing (though I didn't think these were serious issues).

- Company management was nice and helpful.

- Downside was somewhat protected - the deal was at a juicy premium but the underlying bank looked solid and was a takeover target before.

- As far as I know regulators aren't really interested in investigating a microcap banking deal.

- During the first weeks of the year all information that was available was one press release and one shareholder letter. I like these situations where there is limited information, no news for weeks and some uncertainty. Easy to analyse and make a decision - I don't mind reading two press releases and buying this at a 8% discount while waiting for a proxy but apparently others do.

 

Absolute no-brainer as far as I was concerned - within 15 minutes it was obvious that I was going to buy it - the only thing I had to think about was position sizing.

 

I thought the same and bought in, however, I sold around 2/17/18 because a friend sent me this from SNL (for some reason it wasn't posted as a news release):

 

Irvine, Calif.-based Nano Financial Holdings Inc. has resubmitted an application for itself and Allegiant United Holdings LLC to become bank holding companies through Nano's acquisition of Commerce Bank Temecula Valley, Nano's lawyer confirmed.

 

The Federal Reserve Board of San Francisco returned the application Feb. 6. Nano Financial submitted a revised application Feb. 13, Nano's lawyer Gordon Bava, a partner at Manatt, Phelps & Phillips LLP, wrote in an emailed statement to S&P Global Market Intelligence.

 

Bava said the application was returned with a request to reorganize and reformat the responses for easier retrieval of information.

 

"In no way was this action a rejection of the application on the merits," he wrote.

 

He said Nano will provide any additional information regulators reasonably request. "Nano has no reason to believe that the application will not be approved in the usual and normal course because on the merits it is a strong application," Bava added.

 

A returned application is neither approved nor denied. Applications can be returned for technical deficiencies or as an indication regulators are lukewarm on the proposal. Returns are relatively rare: The Fed received 554 applications and returned two of them in the first six months of 2017.

[writser]

Thanks for the information. So maybe I was the fish at the table after all? :P Always hard to judge after the fact. As far as I can see on the FED website the application was returned February 6th and approved March, 27 (link). Seems like both events didn't really cause the stock to move so I guess the news wasn't really considered important (or most shareholders didn't know about it). I agree that it looks a bit suspicious and I might have kept my position somewhat smaller had I known this. Good reminder that you never know as much as you think you do. Or, at least, I don't. I should have spotted that information somehow.

 

Also, isn't it a bit strange that this wasn't mentioned in the proxy? The proxy was dated March, 7, a month after the return. As far as I can see they only mention that Nano doesn't have a bank license yet, not that their application had been returned a month ago. Does seem kind of material to me.

 

Interesting stuff. Always hard to judge if you are either lucky or good.

[writser]

I waived my appraisal rights to get a faster payout. Money hit my account today. IRR: 29.9%

[EricSchleien]

I waived my appraisal rights to get a faster payout. Money hit my account today. IRR: 29.9%

 

Same here. Cash in all my accounts today.

[chesko182]

Excuse my ignorance, but how did you guys do that?

 

If I didn't when should I expect my cash to come in?

Thanks

[Jurgis]

So I called Fido yesterday and they told me that there was a tender offer that was valid until yesterday and they put my shares into that. They told me to expect cash sometimes this week or next week, though I would not put 100% guarantee on their expectation.

 

Not sure if that's the same thing that writser and Og did.

 

Presumably this is closed now. I'd think you'll still get cash, but not sure how/when it will happen.

 

Thanks for the idea Foreign Tuffett and all who contributed.

[writser]

The company offered shareholders to elect to waive appraisal rights for a faster payout. Your broker should have presented that option to you. For me the deadline to make this choice was May, 8 (for other brokers that deadline might have been a few days earlier or a day later or something). I received my payout the 14th. If your broker didn't inform you about this election then, well, your broker sucks :) . Still there shouldn't be any problem, the payout will probably just take a bit longer.

 

FWIW I think Interactive Brokers is basically the only broker that never fucks up stuff like this (and I wish I had bought their stock a long time ago - it's just too expensive for me ... ). They handle corporate actions a gazillion times better than their competitors.

[bizaro86]

Interactive Brokers is awesome for stuff like this. I should probably have just done a concentrated allocation to them when I first took an IBKR position a few years ago, instead of doing all this little arb type stuff.