This Year's Biggest Bank Deal Could Be in Jeopardy

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Support for this year's biggest bank deal seems to be eroding.

Three fund managers have said in the past week that they will vote against PrivateBancorp's pending sale to Canadian Imperial Bank of Commerce, and two proxy advisory firms are urging others to follow suit, raising the possibility that shareholders could reject the deal when they vote on Thursday.

What would happen next is anyone's guess.

It's an unusual situation; investors typically back bank mergers with little fanfare, industry experts said. But a spike in PrivateBancorp's stock since the $3.8 billion deal's late June announcement has raised questions about the pricing.

"These deals tend to go through," said Matthew Clark, an analyst at Piper Jaffray. "We'll have to kind of wait and see at this stage [to see] what happens."

The $463 billion-asset CIBC agreed on June 29 to pay a healthy premium — 2.2 times tangible book value — for the $19 billion-asset Private Bancorp. CIBC has a lot riding on the acquisition since it would give the Toronto company its first U.S. retail operations.

At $47 a share, the pricing also represented a 31% premium to where PrivateBancorp's shares closed the day before the deal was announced. A post-election surge in the stock market — fueled by beliefs that banks will benefit greatly from plans for lower corporate taxes and scaled-back regulation — has created a situation where the deal value now represents a 4% discount to where PrivateBancorp's shares closed Monday.

PrivateBancorp, which is asset-sensitive, also stands to gain from an expected increase in interest rates, prompting some to argue that the company should opt to remain independent.

"There are people who are thinking that Private is worth more on a standalone basis," said John Rodis, an analyst at FIG Partners. "That's why you're seeing people who are willing to vote no."

Among those advising shareholders to reject the deal is Institutional Shareholder Services, which said in a note that it sees no risk "given the material increase in bank stock valuations following the recent election results." ISS expressed a belief that the deal's consideration "no longer appears compelling and does not represent the best alternative when compared to the company's standalone value."

Egan-Jones Proxy Services reversed its stance to recommend that shareholders nix the deal, citing a "recent unexpected change of the political environment in the U.S. and anticipated favorable regulatory changes" for banks. Expected changes have led to a "significant increase in the value of" PrivateBancorp that "calls into question" the offer's fairness, the firm said.

Glazer Capital and Westchester Capital Management have spoken out against the acquisition, and Alpine Associates Management also plans to reject the deal, Bloomberg reported. Those funds collectively owned about 4.1% of PrivateBancorp's outstanding stock at Sept. 30, according to regulatory filings.

PrivateBancorp insiders, in comparison, hold about 7% of the company's stock.

The deal provides "clear … strategic benefits, [a] compelling premium to the pre-offer value and potential for future value creation," James Guyette, PrivateBancorp's chairman, said in a statement issued late last week. He said that, in addition to cash, shareholders will receive CIBC stock "with a strong current dividend yield, providing the opportunity to benefit from the upside valuation potential of the combined company."

CIBC did not return a request for comment.

The meeting would be adjourned if shareholders reject the deal, according to a registration statement CIBC filed in August. Doing so would give PrivateBancorp time to garner more support and additional votes could be held about the deal. The merger agreement is effective for one year from the date it was announced.

"There's always the possibility the seller can go back and ask for more money, especially now that buyers have stronger currencies than they did when the deal was announced," said Kevin Reevey, an analyst at D.A. Davidson. "This is really a chance for CIBC to really attach their wagon to a strong bank in the Midwest, particularly in the Chicago region, catering to middle-market companies."

It's unclear if the recent stock rally could jeopardize other bank mergers, though Rodis said the issue could be relatively unique to PrivateBancorp since its buyer is Canadian. CIBC's stock has only increased by 9% since the U.S. presidential election, while U.S. regional bank stocks are up 20%, he said.

Still, higher stock prices could influence the pricing of future consolidation. Sellers are likely to demand higher prices since buyers have stronger currencies.

"Those sellers that are asset sensitive and have seen interest rates and Treasury yields move up have a lot more bargaining power," Reevey said. "At the same time, buyers have stronger currencies to sweeten the pot."

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