Did Seacoast wait too long to strike a deal?

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Seacoast Commerce Banc Holdings in San Diego spent two years looking for a buyer before it agreed this summer to be sold to Enterprise Financial Services in St. Louis — at a big discount to what it could have received just last year.

Seacoast’s story illustrates just how much the pandemic is changing the math behind merger negotiations, as well as the pressure on potential sellers to lower their pricing expectations or try to hang on until M&A activity picks back up.

The $1.3 billion-asset Seacoast first discussed selling in August 2018, according to a recent regulatory filing.

Deteriorating market conditions, largely because of the coronavirus pandemic, took a bite out of Seacoast’s valuation and significantly reduced the price of the deal. The final $156 million price announced on Aug. 20 of this year was 13% lower than Enterprise’s initial offer in early 2019 — one that the Seacoast board rejected.

Seacoast’s board, based on concerns about growth challenges for banks of similar size, hired Keefe, Bruyette & Woods as its investment bank on Sept. 19, 2018. Though “extreme market volatility” led the board to table the issue in October, it instructed KBW a month later to reach out to “a few selected banks” to arrange introductory meetings with Richard Sanborn, Seacoast’s president and CEO.

Executives at the $8.4 billion-asset Enterprise had their first call with Sanborn in December 2018. An in-person meeting followed a month later.

An unnamed party sent Seacoast a cash-and-stock offer on Jan. 28, 2019, with a value of $25 a share, or roughly $234 million, contingent on the buyer raising capital to help fund the deal. But Seacoast’s board was concerned that volatile market conditions could threaten the proposed capital raise, the filing said.

KBW contacted 30 potential buyers in February 2019. Seven, including Enterprise, signed nondisclosure agreements and were allowed to conduct due diligence, but only three presented offers.

Enterprise proposed paying $18.83 to $19.32 a share, or $176 million to $181 million, with stock making up 80% of the consideration.

Another party offered $21.29 a share, or $199 million, while the company that had offered $25 a share stayed the course.

Seacoast’s board, after reviewing the offers on March 5, determined that each “was not acceptable” and “decided to end the sales process and remain independent,” the filing said. Enterprise and one of the other bidders told KBW they were not interested in increasing their offers.

While Seacoast continued to discuss a deal with the first bidder, the board decided in May 2019 that there were too many risks and uncertainties, including a post-closing plan that called for expanding into “new and enhanced lines of businesses and markets,” the filing said. The other company was also struggling to get investor interest in the deal.

Still, Seacoast remained committed to a sale entering 2020, and KBW reengaged with “a limited number of banks” in February. The board briefly considered an initial public offering, along with other “avenues of liquidity” if a sale didn’t happen, the filing said.

Enterprise reemerged on March 6, when its management team joined a call with Seacoast executives to discuss budget and financial forecasts and modelling assumptions in areas such as cost savings, merger-related expenses and share counts.

That led Enterprise on March 11 to propose an all-stock deal valued at $13.46 a share, or roughly $129 million, based on closing prices the day before. It was 27% lower than the offer Enterprise made a year earlier.

But the filing contends that the new offer had an implied value of $18.11, based on Enterprise’s average stock price over the prior 30 days. And the exchange ratio was 5.6% higher than that of the 2019 bid.

At a March 12 meeting, KBW told Seacoast’s board that there were few banks in a position to pay a premium that directors would consider acceptable. The investment bank also notified the board that market conditions were “deteriorating at an accelerated pace.”

The COVID-19 outbreak was declared a global pandemic on March 11. A national emergency was declared in the United States two days later.

Seacoast’s stock fell by nearly 20% between March 9 and March 12. Enterprise’s shares decreased by 12% over the same period.

While it wanted a higher exchange ratio as a condition of exclusive negotiations, Seacoast’s board decided to keep talking to Enterprise.

Jim Lally, Enterprise’s president and CEO, and Keene Turner, the company’s chief financial officer, joined a videoconference with Seacoast’s board on March 13 to build a rapport and to answer questions from directors.

The deal took a backseat in mid-April, when Seacoast suspended talks to focus on its participation in the Paycheck Protection Program.

Seacoast, a prolific Small Business Administration lender, realized it “would be unable to focus on serving clients while simultaneously trying to provide all the information that Enterprise needed” to take their discussions to the next level, the filing said. Seacoast would eventually originate $92.5 million in PPP loans.

By May 5, Seacoast had rejoined the talks, though it asked KBW to contact other banks in case Enterprise was unwilling to offer an acceptable price.

Another party emerged in late May, offering $13 a share, or $124 million. Enterprise followed on June 1 with an offer of $14.68 a share, or $140 million.

Seacoast’s board decided on June 4 to give each one more chance to increase their offers.

Enterprise’s final offer was $17.50 a share, or $167.4 million at the time, while the other party proposed $15.46, or $147.9 million.

“The Seacoast board … concluded that Enterprise's historic financial performance was stronger than [that of the other company] and that Enterprise had more potential upside over a multiyear period,” the filing said. And Enterprise “had conducted much more due diligence over a longer period of time.”

Enterprise conducted due diligence over the summer, operating under an exclusivity agreement. It sent an initial draft of the merger proposal to Seacoast on July 13.

Seacoast’s board approved the final version of the merger agreement on Aug. 19; it was announced the next day. The final deal value in part reflects a 14% decrease in Enterprise’s stock between June 4 and the announcement.

The deal, which values Seacoast at 151.2% of its tangible book, is expected to close later this year or in early 2021.

Enterprise expects the acquisition to be 4% accretive to its 2021 earnings per share, excluding merger-related expenses, and 11% accretive the next year. It should take less than three years for Enterprise to earn back the expected 2% dilution to its tangible book value.

The plan is to cut a quarter of Seacoast's annual noninterest expenses. Enterprise plans to incur $17.9 million in one-time expenses.

"We are excited to announce this transaction and believe the combination … is an excellent fit for our business model,” Lally said in a press release announcing the deal. Seacoast has “built an extraordinarily successful SBA platform that will complement our commercial and specialty lending verticals."

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