Talmer Execs Draw Fire for Selling at 'Distressed' Price
Banks often draw investor ire when they overpay for an acquisition, but Talmer Bancorp got an earful Tuesday after a pair of analysts accused the Troy, Mich., company of underselling itself.
The $6.6 billion-asset company agreed to sell to Chemical Financial in Midland, Mich., for $1.1 billion in cash and stock. Several analysts were upset that Talmer chose to negotiate privately with the $9.2 billion-asset Chemical rather than staying independent or staging an auction.
Talmer "could have done better standalone than selling in a take under situation," Steven Alexopoulos, an analyst at JPMorgan Securities, said in comments directed toward Talmer's executives during a conference call held to discuss the transaction. "I know you're calling it a merger-of-equals, but in my mind it's a no-premium transaction. I'm just trying to reconcile how we got to this price."
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"You guys are selling for a distressed price after reporting good earnings," Richard Glass, a portfolio manager at Deutsche Bank, added. "The fact you guys did not take this out for process leads me to think the board and management are not upholding their fiduciary duty."
Investors were also dismayed; Talmer's shares fell 5.1% on Tuesday.
The deal's price is equal to about 150% of Talmer's tangible book value and 12.7 times its estimated 2016 earnings, according to Chemical. Over the last two years, sellers with $2 billion to $10 billion in assets have garnered prices that averaged 187% of their tangible book value, according to data compiled by Keefe, Bruyette & Woods.
Such strong reaction forced Talmer's senior managers to forcefully defend the sale.
"We're looking at combining with a great company," said David Provost, Talmer's president and chief executive. "We don't look at it as a sale. We look at it as a merger of equals, so we're taking the best of both companies."
Dennis Klaeser, Talmer's chief financial officer, noted that the company's investors would end up owning 45% of Chemical. Talmer will also receive five seats on Chemical's board, which will be expanded to include 12 directors. He said that focusing on the pricing would overlook the franchise value that would come from the deal.
John Rodis, an analyst at FIG Partners, noted that the estimated deal price of $15.64 a share was lower than where Talmer's shares closed on Monday. "You don't see that often," he said, while also wondering why there were no other bidders involved.
Still, Rodis called it a good transaction, noting it is expected to be 8% accretive to Chemical's earnings in the first full year after closing.
"It seems like there are some synergies there," Rodis said. "They're two Michigan banks, and Chemical doesn't have much presence in the southeastern corner of the state. It all comes down to execution. Certainly the hope is that one plus one is greater than two."
The sale price, meanwhile, may not be as lopsided as it seems to some, said Dallas Salazar, chief executive of Atlas Consulting in Austin, Texas. Though founded in 2007, most of Talmer's growth took place over the last five years, largely through eight acquisitions. "A lot of those deals aren't as seasoned as you would like," Salazar said.
"Talmer shareholders are getting stock in a healther entity," Salazar said. "Everyone is better off. When it's a true wedding and not a shotgun marriage, you don't have to overpay."
The merger would connect Talmer's 81-branch network focused in suburban Detroit, as well as Youngstown and Cleveland in Ohio, with Chemical's 185 branches in central and western Michigan. With virtually no overlap, Chemical plans to close only seven branches.
The deal, expected to close in the second half of this year, would make Chemical the biggest bank headquartered in Michigan, based on its $10.8 billion in deposits in the state. The deal will also provide Chemical with its first operations outside of Michigan.
Talmer received $200 million in capital in April 2010 from a group led by the billionaire financier Wilbur Ross, which the company used to make a series of acquisitions. Ross agreed last year to sell his holdings to Talmer and other investors.
Efforts to reach Ross were unsuccessful.
Executives at Chemical and Talmer were keen to discuss how the day's other big merger — Huntington Bancshares' deal to acquire FirstMerit — could help them increase shareholder value in coming years.
"There is a lot of market share to be captured," Klaeser said.
"Internally, we're going to see very little disruption," Provost added, drawing a distinction between the Huntington-FirstMerit deal and his company's sale. "We feel very comfortable we'll have a great opportunity."