West Coast Bancorp's (WCBO) deal to sell itself for $506 million to Columbia Banking System (COLB) shows how a good price is relative in M&A.
The price tag for the Lake Oswego, Ore., company — recapitalized in 2009 by a handful of hedge funds now interested in selling their 22% equity stake — equals 145% of its tangible book value. That is a modest price for the buyer in comparison with similar deals.
It ranks sixth in price to tangible book among 10 selected deals valued at $500 million to $5 billion since July 2010, according to data from Keefe, Bruyette & Woods (KBW). The figures ranged from the 250% UnionBanCal agreed in March to pay for Pacific Capital of Santa Barbara, Calif., to the 80% M&T (MTB) agreed in August to pay for Hudson City (HCBK) in Paramus, N.J.
In rendering a fairness opinion on Pacific Capital deal, Sandler O'Neill and Partners analyzed seven bank and thrift acquisitions nationwide worth at least $500 million between June 2009 and March 2012. The median price paid was164%.
Why would investors in the $2.4 billion-asset West Coast such as Castle Creek Capital Partners, GF Financial, and MFP Partners agree to sell for a relatively low price?
There are two answers, and they involve investment time frames and other special considerations, experts say.
The hedge funds that recapitalized West Coast bought into the company at a price that works out to around $10 per share. They are selling for more than $23 per share three years later.
Michael Price — the principal of MFP — paid $17 million for an 8.85% stake he stands to sell for $39 million.
Private equity and hedge funds prefer to exit in three to five years. The closer to three the better, as the more years you hold something the lower your internal rate of return tends to be. Taking your chips off the table after more than doubling your money is a safe bet.
The second reason to sell for a bit less than the median market rate is that the way this deal is structured would give investors the option to roll some or all of their interest into a bigger company with a stronger profitability profile. Investors can be paid in cash or stock.
The buyer has agreed to pay $264.5 million in cash and as much as 12.8 million of its shares.
Both companies have too much capital. This hurts their returns on equity. Tepid loan demand and low yields on securities investments means they basically have a lot of dead cash sitting on their balance sheets. Columbia would essentially put its excess capital to work as an investment in West Coast under the deal.
The post-merger company is to have a Tier 1 common equity ratio of 12.37%. Columbia's current Tier 1 common ratio is 19.51%, and West Coast's is 16.37%.
Castle Creek, GF and MFP have already pledged their support for the deal, Robert Sznewajs, West Coast's president and chief executive, told American Banker on Wednesday.