Add the leading proxy firms to the list of parties sparring over Bond Street Holdings' agreement to buy Atlantic Coast Financial (ACFC) in Jacksonville, Fla.
Institutional Shareholder Services has advised shareholders of the $784 million-asset Atlantic Coast to accept the $5 per share that Bond Street has offered. However, Glass, Lewis & Co. has recommended that shareholders vote against the deal.
Clashing advisory opinions are rare.
"It is surprising because [ISS and Glass Lewis] are pretty much in lockstep on most transactions," says Frank Bonaventure Jr., a partner at the law firm Ober, Kaler, Grimes & Shriver. "There are clearly differing opinions of its merits."
The shareholder vote is scheduled for Tuesday, and Atlantic Coast needs a majority of the outstanding shares to be voted in approval.
The transaction has been fraught with drama all year. A week before the $13.1 million deal was announced in late February, Atlantic Coast's former chairman, Jay Sidhu, who is currently chairman and chief executive of Customers Bancorp (CUBI) in Wyomissing, Pa., announced he and another director were seeking a board shake-up.
Initially, Bond Street had agreed to pay $2 per share up front and hold $3 per share in escrow to cover any potential shareholder suits. Bond Street later withdrew the holdback after criticism by Sidhu and others about that aspect of the deal and others.
The concession did not prevent shareholder litigation. Investors, led by Jason Laugherty, filed a class action in late May that challenged Bond Street's cash offer as too low. Atlantic Coast announced a settlement Wednesday under which it agreed to disclose more details of its financial analysis. The suit didn't involve Sidhu.
Sidhu, along with fellow director Bhanu Choudhrie, own roughly 7% of the company and have spent the last few months exchanging biting letters with the company.
Sidhu's core argument is that the offer, at 33% of Atlantic Coast's stated tangible book value, is too low. The company and the economy are improving, and shareholders would be better served by staying independent and raising additional capital, he says.
Atlantic Coast has repeatedly said that its bank is only "adequately capitalized" and carries a lot of nonperforming assets. It says it weighed many options, decided it must sell and that the Bond Street offer is the only one available. The parent company is burdened with debt, and regulators could take action against the bank unit should shareholders reject the deal, Atlantic Coast has warned.
In its report, ISS agreed.
"The proposed merger transaction seems to be the best outcome from the company's strategic alternative process, which began in late 2011," according to an excerpt of the report provided by Atlantic Coast.
Given Atlantic Coast's poor stock performance before the deal announcement, its need for capital and the credit problems, the "consideration of $5.00 seems reasonable," ISS says. ISS also warned of the risk of regulatory action if the deal collapses.
Glass Lewis' recommendation to vote against the deal cites dissension among the seller's directors.
"While [Atlantic Coast] appears to us to have conducted a fairly lengthy strategic review process, we believe that shareholders should be concerned with the fact that the board was unable to reach a unanimous verdict regarding the proposed merger," the report reads. The vote was 7 to 2, with Sidhu and Choudhrie dissenting.
Glass Lewis also said it questioned the "extent to which the board truly considered a recapitalization alternative."
"In late January 2013, the board rejected, by merely one vote (5 to 4), a proposal to concurrently pursue both the Bond Street merger and the recapitalization proposal," the report says. "This suggests to us that a significant number of board members felt that the recapitalization had some merits and was worth considering."
ISS said in its report that the raise would be difficult to execute in the current economic and regulatory climate.
Glass Lewis noted that Atlantic Coast's stock has been trading above the $5 offer since early May, suggesting that the market thinks another offer from Bond Street or a rival bidder is possible.
Its shares closed Thursday at $5.20, up four cents. At midday Friday, it had fallen to $4.95.
Atlantic Coast and Bond Street declined to comment for this story, but Sidhu dismissed the ISS recommendation while reveling in the Glass Lewis report.
"ISS doesn't surprise me at all; I don't ever recall them voting against any M&A deal," Sidhu said. "But it is an absolute fact that [Atlantic Coast] never considered the recapitalization proposal."