Pass. Pass. Pass. Pass. Pass. Deal! When healthy banks have M&A leverage

Reliance Bancshares in Des Peres, Mo., passed on five offers before agreeing to be sold to Simmons First National in Pine Bluff, Ark.

Two of the rejected offers came from the $16.3 billion-asset Simmons, which eventually reached a deal to buy the $1.5 billion-asset Reliance in November. The deal is expected to give Simmons a big boost in the St. Louis area.

The sale represents the final chapter for Reliance, a bank that suffered substantial losses in the aftermath of the financial crisis. A group led by Tom Brouster came in during 2012, recapitalized the bank the next year and orchestrated its turnaround.

Reliance’s sale process, outlined in a regulatory filing tied to its merger agreement with Simmons, highlights the position of strength that healthy sellers have in the current M&A environment. The final offer also took into account a swoon in Simmons' stock as it was negotiating with Reliance.

Simmons' final offer was 27% higher than its original pitch in the fall of 2017.

Reliance’s board began looking for a buyer in early 2017 after determining that the bank had achieved sustainable profitability and performance following the turnaround, the filing said. Reliance’s investment bank identified 11 potential acquirers, including Simmons, with a focus on banks that already operated around St. Louis.

Simmons had three branches and $137 million in deposits around St. Louis last June, based on the most recent data from the Federal Deposit Insurance Corp.

After two meetings with Reliance executives, Simmons made its initial pitch in October 2017. Simmons offered $200 million, including $134.4 million in cash and stock to those who held Reliance common stock, a preferred stock swap valued at $42.1 million and a commitment to pay $23.5 million Reliance owed to other parties.

Reliance rejected the offer, countering with a request for a 42% higher payout to holders of common stock. Simmons came back with another offer that represented a 24% increase in the consideration for those investors.

That offer was also rejected and the companies discontinued discussions. Additional talks took place in early 2018, but Simmons wanted to postpone in-depth discussions until later in the year.

Reliance held discussions from mid-2017 to July 2018 with at least two other banks and a mortgage lender, the filing said. The board nixed an all-stock offer valued at $205.6 million to $210.6 million, an 85% stock offer of $230.6 million and a 90% stock offer of $250.6 million to $255.6 million.

The mortgage lender walked away without submitting an offer after determining that the costs of “building a large residential mortgage function within Reliance … would be too expensive to justify a price commensurate with Reliance’s valuation expectations,” the filing said.

Reliance passed on the biggest offer largely because of the “potential volatility” in the suitor’s stock price, the filing said. The bidder also refused to offer a specific price or meaningfully increase the cash consideration.

Reliance decided last summer to reconnect with George Makris Jr., Simmons’ chairman and CEO. Simmons said it was willing to increase its offer if it could conduct more due diligence.

Simmons in late July gave Reliance two options.

The first option had a value of $253.1 million with 75% stock consideration. The other offer had 70% stock and a $250.6 million value. Reliance chose to negotiate around the offer with more stock.

That’s when the stock market intervened.

Simmons’ stock fell before the parties could executive the letter of intent. So Simmons committed more stock, increasing the deal's value by about $800,000.

The letter of intent was signed on Aug. 3.

Volatility in bank stocks in October and November put more pressure on the deal. Simmons’ stock fell 14% between July 26, a week before the letter of intent was executed, and the day the deal was announced.

Simmons again altered its offer, agreeing in November to increase the amount of cash by 33% to protect the deal. The deal was also contingent on unanimous approval from Reliance’s board and a commitment from Brouster, Reliance’s chairman, and Gaines Dittrich, its vice chairman, to support the deal.

Brouster controls 46% of Reliance’s stock, the filing said. Dittrich has a 2% stake.

The boards of both companies unanimously approved the merger on Nov. 13. The deal, announced the same day, priced Reliance at 187% of its tangible common equity. It is expected to close in the second quarter.

Simmons expects mid-single-digit accretion to its earnings per share. It should take a little more than three years to earn back the expected 3.5% dilution to Simmons’ tangible book value.

Simmons said it will likely incur $6.4 million in merger-related charges. It plans to cut 30% of Reliance’s annual noninterest expenses.

“By adding Reliance Bank’s 20-plus branches to the Simmons … footprint, we will substantially enhance our retail presence within the St. Louis market, where we’ve already seen success in our commercial lending efforts,” Makris said in a press release announcing the deal.

Brouster & Associates, a consulting firm owned by Brouster, will receive $1.4 million to provide services to Simmons for 27 months after the deal closes, the filing said. The Dittrich Co., owned by Dittrich, will be paid $557,000 for a 15-month period of providing consulting services after the deal closes.