Arkansas Deal Shows the Power of Patience … and a Rich Stock

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After combing the beaches of Florida the last few years, Home BancShares' John W. Allison is headed, well, home to be with the one.

The Conway, Ark., company's agreement to buy Liberty Bancshares in Jonesboro, Ark., for $280 million is the "game-changer" Allison says he has pursued for a decade. It's also the latest example of bank deals born from years of conversations and persistence.

"I've been after this deal for ten years," Allison, chairman of Home (HOMB), told analysts after the announcement Tuesday. "I've walked off from it, I've been hit in the nose, I've been run off, the door's been shut in my face, and I said many times I'd never go back. And I went back and went back and the deal got done."

Punctuating his personal take on the deal, he said: "I don't have a lot of patience, but I had plenty of patience for this deal because it is the right deal."

In many ways the deal has been in the works since the 1960s. Allison, a Jonesboro native, met Wallace Fowler, Liberty's chairman, as a teenager. Allison was working in a clothing store and Fowler owned a nearby furniture store and the two would talk as they swept their respective storefronts. They both got into banking, and their paths crossed again in the 1980s as fellow executives of First Commercial Corp., which sold to Regions Financial (RF) in 1998.

Allison said Wednesday that his comments about being chased away were in jest, but Liberty had rebuffed his overtures. A call to Fowler, 79, was not returned, but Allison,66, said the $2.8 billion-asset Liberty had not been interested in a deal until recently.

Its reasons for selling now are similar to the reasons prompting most sales: a fear of the operating and regulatory environment, an aging shareholder base and a desire for liquidity.

"The shareholder base has been in this deal for a decade," Allison said. "Boards are tired, there are more costs associated with running a bank. They wanted to hook their wagon to a company with liquidity and a stable dividend."

The $4.2 billion-asset Home has strengthened its valuation in recent years. It thrived in the downturn and has been a bargain M&A shopper, buying nine failed and open but troubled banks in Florida. Its stock before the announcement Tuesday traded at 270% of its tangible book value and 16.5 times its earnings, making it one of the most richly traded stocks among community banks, analysts say.

Investors seemed to embrace the deal, as Home's share price rose 7% in the final hours of trading Tuesday and climbed an additional 13% Wednesday.

"Their stock has benefited from the [failed-bank] deals, and they are now using their strong currency for regular M&A," says Brian Martin, an analyst at FIG Partners in Chicago.

In an environment where deals are valued at a fraction of what they were a few years ago, the value of buyers' stock has increased in importance. The banks with the strongest currencies, for instance those that trade in excess of two times their tangible book value, are using their stock to buy. That group includes Bank of the Ozarks (OZRK), F.N.B. Corp. (FNB), and SCBT Financial (SCBT).

Investors often shy away from expensive stocks, but they should take notice of them, says Joseph Fenech, an analyst at Sandler O'Neill. Essentially, the high traders are not sitting idle, and if they act deftly in picking acquisitions, there is still considerable upside in their stock.

"A high valuation is something that often leads investors away, but I think having a highly valued currency should become a core component to their investment thesis," Fenech says. "What you're seeing is that these banks are doing hugely accretive deals and it stands to reason the stock should follow suit."

Allison says he is aware of his ability to use his currency now. He says it gives him ability to structure highly beneficial deals. The Liberty deal was priced at 160% of the seller's tangible book value.

"When your currency is strong, you have the ability to leverage that to make some really nice accretive deals," Allison says. "I've had bankers tell me they want my stock but want me to pay them three times tangible book. If I did I wouldn't trade where I do. If you do the right deal on the front side, the seller wins and everybody is happy."

But there is little question that buyers have to show unrelenting effort to make deals happen. F.N.B. and SCBT have said that their respective deals with PVF Capital Corp. (PVFC) and First Financial (FFCH) were years in the making, with the buyers waiting for just the right time to strike.

Whatever the reason for Allison's success, analysts spoke well of his deal. They are expecting it to add 25% to Home's earnings in 2014.

Home is expecting the deal to be 6% dilutive to its tangible book value and is projecting that to be restored within 18 months.

"It is hard to come up with a deal with better economics than that," Fenech says. "If it turns out right, it is like deal nirvana."

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