FNB Corp.'s deal with Virginia Financial Group Inc. was billed as a merger of equals, but a dissident group says it is an outright sale that significantly shortchanges FNB's shareholders.
Now this small but growing band of shareholders is lobbying other FNB investors to vote against the agreement announced in July, and is using a just-released report from a Virginia Tech economist to try to bolster its case.
Whether they can succeed in derailing the deal remains to be seen.
FNB officials insist the deal has widespread support among investors, employees, and customers, and say they are confident it will be approved when comes to a vote this quarter.
And analysts who follow the companies said FNB could be hard-pressed to find a better deal.
"FNB shareholders need to realize their combined stock is probably better off and more likely to go up than down as these companies come together," said Bryce Rowe, a senior research analyst with Robert W. Baird & Co. Inc.
The merger of FNB, in Christiansburg, Va., and Virginia Financial, in Culpeper, would create Virginia's largest commercial banking company, with $3 billion of assets, $2.6 billion of deposits, and nearly 70 branches throughout the state.
Technically the $1.5 billion-asset Virginia Financial is buying FNB for about $240 million in stock, or $32.43 a share, but the parties are calling the deal a merger of equals because FNB shareholders would own 52% of the company and have equal representation on the boards of the holding company and a bank subsidiary yet to be named. FNB executives would also retain key management positions.
The deal's opponents, including a former employee and three current FNB directors, have formed a group called the FNB Corp. Shareholders Committee. The group argues that FNB is worth much more than the agreed-upon price, and it says the ramifications of the merger — including job loss associated with plans to move the combined company's headquarters out of Christiansburg — would be a blow to the community.
The group also has this for ammunition: an analysis by Virginia Tech finance professor Vittorio Bonomo, Ph.D., that concluded FNB is worth roughly twice what Virginia Financial agreed to pay.
The analysis — which the dissident group commissioned and paid for — was filed in proxy materials Wednesday with the Securities and Exchange Commission. Prof. Bonomo concluded that a fair price for FNB's stock would have been roughly $65.34 a share, or about 2.7 times book value.
"The analysis clearly demonstrates that there is a substantial deficiency in what would be reasonably considered adequate compensation," Prof. Bonomo said in his report.
Shirley Martin, the Shareholders Committee's chairman, called the $32.43 price "ridiculous."
"You are giving away a profitable bank," said the 60-year-old Ms. Martin, a former vice president for compliance who retired from FNB in 2004 after 38 years with the company.
But Mr. Rowe used the same word — ridiculous — to describe the $65 price Prof. Bonomo came up with.
"If one of the largest banks in the country wanted to come in and buy this company, they aren't going to pay $60 a share," he said. "The earnings stream coming out of FNB could not justify the price."
FNB earned $4.6 million in the second quarter, up 2.6% from a year earlier.
On Wednesday it said it expects to report a 25%-30% drop in third-quarter earnings, largely because of an anticipated $3.2 million chargeoff on a loan to a real estate developer.
Megan Malanga, an analyst with Stifel Nicolaus & Co. Inc., agreed that $65 is too high, especially in a deal which the seller would retain so much control of the merged company. She and Mr. Rowe also questioned Prof. Bonomo's methodology of using only FNB's book value to set the price, and said he did not take into consideration other factors, such as earnings performance and the location of its branch network in southwest Virginia.
"I look at other possible acquirers and I can't think of other banks that want to get in that part of Virginia," Ms. Malanga said.
While $65 per share may be too high, Gray Medlin, the managing director in the Raleigh office of Carson Medlin Co., said $32.43 is too low.
"FNB is a premium franchise," he said. "It's almost 30 offices, $1.5 billion, and 100 years old. That's a trophy franchise, and trophy franchises don't come along very often. The owners deserve a high premium for the company."
In an interview this week, William P. Heath Jr., FNB's president and chief executive, said the dissidents "are speaking out of both sides of their mouths."
"They don't want to sell the company, but they are looking … [for a higher] share price if you sell the company," he said. "It doesn't make any sense."
Mr. Heath said that while the dissident group's effort to block the merger is "obviously something we are thinking about," he does not expect that other shareholders will buy the group's arguments.
"Some of the things that are being said about the merger by this crowd are shades of the truth," he said.
Addressing claims that FNB shareholders are being shortchanged, Mr. Heath said there is "rarely a significant premium" associated with a merger of equals.
"When you get a huge premium, the trade-off is there is a significant reduction in infrastructure," he said.
Mr. Heath noted that though the holding company's headquarters would move from Christiansburg to Charlottesville, the bank's headquarters and the combined company's operations center would be in Christiansburg.
"They are not talking about that," Mr. Heath said. "There is nothing in that stuff they put out that is positive.
Mr. Heath said that he is in the process of quantifying potential job losses. "It's too soon to say how many, if any, jobs will be lost," he said.
For the deak to move forward, a majority of the FNB's 7.4 million shares outstanding must vote in favor of it.
Kendall O. Clay, a dissident who has served on FNB's board for 19 years, said that the 10 original members of the FNB Corp. Shareholders Committee own 273,324 FNB shares, which is greater than the number of shares controlled by the nine directors who supported the transaction.
And the committee, which has since grown to roughly 45 members, now controls millions of additional shares, Mr. Clay said. "It looks very positive for us that we will be able to defeat the management's proposal," he said.
The 10 original members of the Shareholders Committee include three current FNB directors — Mr. Clay, H. Douglas Covington, and Daniel D. Hamrick — who voted against the proposal when it came before the board.
Ms. Martin, who said she owns more than 41,000 shares of FNB stock, said she was "shocked" when she initially learned about the merger agreement. She helped organize the dissidents, who gather for weekly meetings in the community room of a local Masonic Lodge.
"Each time we have a meeting there are additional people who join," Ms. Martin said. "We have not advertised this meeting. It is only word of mouth."
Members of the group are now phoning other FNB shareholders throughout the country to build opposition to the deal, she said.
For his part, Mr. Heath insists that the deal is in the best interest of the shareholders, community, and employees.
"We are able to double the size of our company and move into faster-growing markets, we are able to enhance shareholder value and we are able to create something that has true value going forward in the next three to five years," Mr. Heath said.
Mr. Heath said the measure will come before a shareholder vote in December.
