Buyout drama in N.C. highlights flaw in MOE deals

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First Citizens BancShares may have found the Achilles' heel for mergers of equals — their low premiums.

The $35 billion-asset regional disrupted the proposed merger of SmartFinancial in Knoxville, Tenn., and Entegra Financial in Franklin, N.C., simply by agreeing to pay a lot more money to buy Entegra. First Citizens, which is based in Raleigh, N.C., was also willing to plunk down cash, trumping the all-stock deal that the smaller banks had arranged.

First Citizens was willing to pay $219.8 million for the $1.6 billion-asset Entegra, or 35% more than what SmartFinancial had agreed to pay. While the number wasn't immediately available, First Citizens' premium will easily eclipse that of the SmartFinancial deal, which priced Entegra at just 119.4% of its tangible common equity.

The average premium for deals announced this year is 163% of the seller's tangible common equity, according to data compiled by S&P Global Market Intelligence.

Participants in mergers of equals tend to accept lower premiums based on a deal's perceived long-term opportunities, leaving negotiations to largely focus on management structure, headquarters location and brand concerns, industry experts said. However, low premiums make such deals susceptible to rival bids from banks with stronger currencies that can guarantee a bigger near-term payout.

First Citizens is just such a bank — it's flush with capital and free cash, according to Christpher Marinac, director of research at FIG Partners in Atlanta. Moreover, its ownership structure, with a single family possessing a controlling stake, gives it added leeway to offer terms other banks might hesitate to consider.

"They can make decisions for the long term," Marinac said of First Citizens Wednesday in an interview. "They don't have to appease investors."

A higher price and premium were "certainly part” of Entegra’s decision to sell to First Citizens, said David Bright, Entegra's chief financial officer. He also noted that both banks also “have a very strong presence in western North Carolina,” so the deal will create a “dominant” regional franchise.

Assuming no divestitures, First Citizens will have 31 branches and nearly 40% of the deposits in the 10 western North Carolina counties where Entegra has branches, based on June 2018 data from the Federal Deposit Insurance Corp. The area's runner-up would be United Community Banks in Blairsville, Ga., with 14% market share.

“The combination is pretty compelling,” Bright said. “We’re very comfortable with First Citizens. They’re family owned and they’ve been around for more than a century.”

The deal also offers First Citizens an opportunity to increase its market share in Upstate South Carolina, since Entegra has branches in several markets.

“When this came forward, we thought it was a great opportunity to grow in both regions,” said First Citizens spokeswoman Barbara Thompson.

First Citizens, which is largely owned by the Holding family, has a reputation for pursuing unusual bank deals. The company has bought failed banks in farflung markets such as Denver, Los Angeles and Milwaukee. It orchestrated the 2014 buyout of First Citizens Bancorp., a South Carolina bank that was also owned by members of the Holding family.

The company has also completed four deals — all 100% cash — since May, with another, for the $237 million-asset First South Bancorp in Spartanburg, S.C., pending. Most of those targets have been much smaller banks and the types of deals that banks of First Citizens' size typically eschew.

Not all of its targets have been willing. Last year, First Citizens launched a hostile bid for the $397 million-asset KS Bancshares in Smithfield, N.C., that landed the companies in court. The battle ended only after KS agreed to buy back the stock First Citizens had accumulated during its takeover attempt.

First Citizens also hold stakes in a number of other banks, including Carter Bank & Trust in Martinville, Va. It owns a 1.6% stake in Entegra.

Industry observers have noted in the past that First Citizens' management and ownership structures have allowed it to follow a unique path with bank acquisitions.

Despite its hectic pace the past year, Thompson said First Citizens doesn't need to take a breather from M&A.

“We have a very strong team that’s done quite a few of these,” she said. “I would say they’ve handled them very well in all cases.”

A clause in the merger agreement with Smart allowed Entegra to enter into discussions with First Citizens. Those talks began in early March and progressed steadily over the next seven weeks as First Citizens conducted due diligence, Bright said.

First Citizens also agreed to pay Entegra's $6.4 million termination fee to get out of the SmartFinancial deal.

Three Entegra executives — Bright, CEO Roger Plemens and Chief Operating Officer Ryan Skaggs — were set to join SmartFinancial's management team once that deal closed. There have been no discussions of similar arrangements with First Citizens, Bright said.

While SmartFinancial Chairman W. Miller Welborn expressed regret his company was unable to close though deal, he said understood Entegra's choice. At the same time, SmartFinancial was unwilling to match or top First Citizens' offer.

"They had to address" First Citizens' offer, Welborn said. "It was such a [significant] premium."

Welborn referred to the termination fee SmartFinancial will receive "a grand second-place prize," though he noted that his company "didn't build a business model on termination fees."

With Entegra off the table, SmartFinancial will "absolutely" resume its strategy of pairing organic growth with opportunistic acquisitions in markets contiguous to its Alabama, Tennessee and Florida Panhandle operations, he said.

"There are a lot of opportunities out there for us," Welborn said.

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