Bank M&A's super shoppers
The post-election rally in banking stocks has given certain buyers the ability to make bank acquisitions that immediately (and uncharacteristically) add value.
At least seven M&A deals announced since early November have been structured so that the buyers’ tangible book value will rise at closing.
Granted, the gains are on paper and such deals are expected to be the exception and not the rule, but the development has created a group of banks — including Home BancShares, Pinnacle Financial Partners and Sterling Bancorp — that could parlay their stronger shares into more acquisitions or command a higher asking price if they decide to sell.
“We’re seeing a few more examples where tangible book accretion is happening upfront," Chris Marinac, an analyst at FIG Partners, said during a recent conference call highlighting emerging trends in bank mergers. "It’s something that we’re hearing more about."
Several factors are responsible.
Bank stocks have risen 24% since the election, fueled by rising interest rates as well as high hopes the Trump administration will push through tax reform and regulatory relief. Higher stock prices have strengthened the value of equity issued in bank deals, particularly for institutions that already had strong stocks before Election Day. Though the market rally cooled a bit in recent weeks, a number of buyers have maintained an upper hand.
Banks with strong currencies are often best served to do deals with a large stock consideration and minimal cash. Those types of deals need sellers that are willing to accept a lower upfront price based on a view that its investors will reap long-term benefits by holding onto buyers’ stocks, Marinac said.
“This isn’t going to happen all the time, but it is happening more,” Marinac said.
The situation also requires discipline by the buyer, which could be a function of the shareholder base. Bankers who own large stakes in their companies, for instance, might be inclined to exercise more restraint and wait for deals that immediately add value.
Johnny Allison, the chairman of Home BancShares, said he never does dilutive deals. Then again, Allison is among the Conway, Ark., company’s biggest investors, holding nearly 5% of its stock on March 1.
“There are four or five of us in the country that protect their shareholders in that fashion,” Allison said.
The $10.7 billion-asset Home’s pending purchase of Stonegate Bank is expected to boost its tangible book value by 6%, according to data from FIG Partners and S&P Global Market Intelligence.
Sterling, based in Montebello, N.Y., could see its tangible book value rise by 12% after it acquires Astoria Financial in Lake Success, N.Y. Buying BNC Bancorp in High Point, N.C., could boost the tangible book value at Pinnacle by 5%.
“There’s some balancing act that potential acquirers might look at,” said Terry Turner, president and CEO at Pinnacle, which is based in Nashville, Tenn. “There’s a lot of emphasis and energy around” a deal’s potential impact on tangible book value.
Often the focus is on minimizing dilution, Turner said. Though a deal might not boost tangible book value right away, it could help a bank’s earnings, he said.
Most deals still tend to include a degree of tangible book value dilution and a timetable for how long it could take a buyer to earn it back. That is because a number of other factors influence mergers, including cultural and social issues, a seller’s scarcity value and the number of potential buyers circling a deal.
“I don’t think it’s realistic to expect the majority of bank deals to be accretive to tangible book on the day they close,” said Gary Tenner, an analyst at D.A. Davidson, adding that rising premiums for sellers will work against buyers seeking immediate accretion.
Since the election, deals valued at $2 billion or more have had an average premium of 2.4 times the seller’s tangible book value, representing a notable increase from recent years, based on data compiled by Compass Point.
“There's not a lot of banks that can pay that price and have it be accretive to their tangible book at closing,” Tenner said.