If Matt Wagner wrote a book called "Bank M&A for Dummies," the first two chapters might be titled "Only Pick Fights You Can Win" and "The Numbers Better Add Up."
The pugnacious chief executive of PacWest Bancorp (PACW) could base both lessons on his proposed $231 million takeover of First California Financial Group (FCAL) — a smaller L.A. rival that was deeply reluctant to sell.
Wagner had played hardball with First California and justified it Tuesday in announcing an investor-pleasing deal for the Westlake Village company.
He took a substantial risk in May by going public with the news that First California's CEO, C.G. Kum, and its board had rebuffed PacWest's $212 million offer for the 15-branch company. Announcing that bid was an old-school "bear hug," or attempt to force an unwilling seller's hand by making an appeal to activist investors.
Had the move failed, Wagner — who declined to be interviewed for this story — would have looked like a brute who cannot close a deal. That would have been bad because his job at PacWest presumably is to build an operation that he and his private-equity investors can eventually sell to U.S. Bancorp (USB), UnionBanCal or another big regional player.
Going on the offense could have also forced First California into the hands of those institutions or another acquisitive bank. Wagner earlier this year outbid Umpqua (UMPQ) of Portland, Ore., for the tiny American Perspective Bank in part to keep another big bank from entering central California.
With these two deals, Wagner just told everyone with an interest in West Coast bank mergers that he can and will buy what he wants. That is a good signal for a roll-up specialist to send.
Had he agreed to overpay for First California, that would have been bad, too. He did not.
His $8 per-share offer values First California at about 170% of tangible book. That is a reasonable premium over the median 130% tangible book paid for West Coast banks with at least $100 million in assets since January 2010, according to Sandler O'Neill & Partners data.
Most importantly, investors seem to like this deal.
PacWest's shares were down less than 1% Wednesday, to $23.07, on the same day as a post-election plunge in the markets and a 3.8% fall in the KBW Regional Banking Index (KRX) .
PacWest's buying power relies on its hefty share price, which as of mid-Wednesday traded at a multiple of roughly 170% of tangible book.
Its future deals — and even this deal — depend on PacWest maintaining a strong share price. If PacWest's shares are lower than $20 at closing, the deal is to be reworked in a way that would force PacWest to issue more shares. (If PacWest is worth more than $27 at closing, it would have to issue fewer shares.)
In recent years shareholders above all else have objected to dilution to equity, or earnings per share. This deal would result in severe dilution of equity, but PacWest projects strikingly high earnings accretion.
It would dilute PacWest's tangible book value by 10% upon closing. That is higher than the tangible book dilution foreseen in two other big, all-stock transactions recently: FirstMerit's (FMER) deal for Citizens Republic Bancorp (CRBC) and NBT Bancorp's (NBTB) pending purchase of Alliance Financial (ALNC).
PacWest expects the addition of First California to boost earnings by 12% during the first 12 months of ownership. FirstMerit forecasts first-year earnings accretion of more than 7% in its deal. NBT forecast earnings accretion of 3% in 2013 and 6% in 2014.
Investors hated NBT and FirstMerit's deals. Their shares have yet to recover from the sell-offs that followed their deal announcements.
PacWest's investors initially appear willing to accept the equity dilution for a few reasons.
Unlike most banks, it trades off of its earnings, not equity. Investors buy into it because they like that it makes money and pays a dividend. It just raised its quarterly dividend to a quarter per share from 18 cents per share. Its annualized return on average assets in the third quarter was 1.16%.
So investors love anything that gives PacWest more profits.
People who buy into PacWest are also buying into its roll-up strategy and anticipate some tangible book dilution along the way. They want to see it bulk up and eventually sell. The post-merger PacWest would be a bigger company worth more money, with $7.5 billion assets and 81 branches from central California to San Diego. PacWest would become the eighth largest publicly owned bank based in California.