Bank M&A Deals Designed to Withstand Market Shocks

First PacTrust Bancorp's cash-and-stock deal for Beach Business Bank is designed to ensure neither party gets clocked if the buyer's share price drastically changes.

It is the latest example of wannabe buyers getting creative to get a deal done in a rocky economy.

Since most bank deals are paid for with stock, market watchers had worried that the Aug. 10 plunge in global stocks and subsequent volatility would sink negotiations in progress.

First PacTrust's purchase of Manhattan Beach, Calif.-based Beach ensures the final price tag does not get much higher or lower even if First PacTrust's shares rise or fall sharply by the first quarter, when the deal is scheduled to close.

"I think you'll see more of this unusual structure going on," said Wesley Grace, managing director of Wunderlich Securities Inc. of Memphis, which advised First PacTrust in the deal. "You have to be creative to come up with a way to keep both parties at the table."

Sandler O'Neill & Partners LP was the investment bank adviser to Beach.

Their agreement establishes different ways that PacTrust can pay for the deal, depending on how much its shares are worth by the closing date. Basically: Beach shareholders will get more cash if First PacTrust's shares do not recover the nearly 18% they have lost this month. If First PacTrust's shares rebound within a certain range that the company is projecting, Beach shareholders get paid more in stock.

The initial terms value Beach at $37.4 million, or $9.07 per share. The final purchase price should be at least that much, and potentially a bit higher depending on how things pan out.

"We wanted to be clear to the market that we fully expect this to be a cash-and-stock transaction but if it isn't, we created the mechanisms to work well for PacTrust and Beach," First PacTrust President and Chief Executive Gregory Mitchell said in an interview. "Sometime in periods of great volatility in the market, people get concerned that deals are a bust. Now we've shown to the market that this deal will make it no matter what happens."

That price is based on the assumption that First PacTrust's shares will rise to between $13.50 and $16.50 apiece. (Its shares closed Wednesday at $11.87.) Should that occur, it will pay Beach shareholders $18.62 million in cash and 1.362 million in company shares.

"We are assuming that at closing our stock will be trading at a price greater than $13.50 a share," Mitchell said in a conference call with analysts. "So we've set up an exchange ratio that provides a strong level of upside potential to the shareholders of Beach."

The deal changes in two ways in the "unlikely event that our stock continues to languish" below $13.50 by the closing date, he said.

If that happens, it becomes an all-cash deal with an extra benefit for Beach shareholders: They would receive about $37 million in cash as well as warrants to buy 1.362 million of First PacTrust shares at $14 per share. The warrants could be exercised within one year. That kind of warrant offer is an unusual twist to the standard practice of capping how many shares a buyer may have issue to when paying with stock.

There is a third tweak should First PacTrust's stock price soar in value. Beach shareholders would no longer get a fixed number of First PacTrust's shares if they are worth more than $16.50 at closure. Instead, they would get a volume of stock based on the fixed value of $21.98 million.

Though bank merger activity has been slow, the deals that have been announced this summer have included creative elements because volatile bank stocks and loan quality worries have made settling on a straight-up price difficult.

Some other recent deals with unusual structures: MidSouth Bancorp on Tuesday agreed to buy only certain assets and deposits of First Louisiana National Bank, rather than the entire franchise. In June, First PacTrust agreed to buy another California business bank called Gateway Bancorp for $17 million, with a portion of final price set aside for three years to cover potential mortgage losses.

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