Seven months after announcing its third attempt to buy a bank, the blank-check company Western Liberty Bancorp has changed the terms of its most recent deal.
Last week the $85 million-asset special-purpose acquisition company said it would still pay book value for Service1st Bank of Nevada, but lessened the lure of a sweetener that would reward Service1st shareholders should Western Liberty's stock price increase.
Another new wrinkle to the acquisition: Western Liberty will pump $25 million in fresh capital into Service1st upon the deal's closing, up from the $15 million agreed upon when the companies struck the deal last November.
Plenty can happen in seven months, banking experts said, and with regulatory approval taking longer than usual, such changes to deals are to be expected.
"You cannot commence a process 120 days prior to its closing and expect that the deal is going to behave exactly like you assumed it will," said James Rockett, a partner with Bingham McCutchen. "In this environment there are just too many imponderables."
Creativity has been a cornerstone of community bank deals in the past two years, with acquirers building in all sorts of provisions to protect shareholders in the event they buy a lemon. At the same time, sellers have found ways to recoup some of the upfront discounts they must offer if banks outperform expectations.
Yet investment bankers said flexibility is also key to closing bank deals these days. Given that most current deals contain an element of desperation, it's become more accepted that either party will agree to amended terms.
"In a normal market if the buyer came back to adjust the terms the seller could just tell them to get lost," said Charles Crowley, managing director at Stifel Nicolaus & Co. Inc. "Now, there is a willingness to shift just to get the deal done."
It is unclear what prompted the amendments to the Western Liberty and Service1st deal; Western Liberty declined to comment and Service1st did not return a phone call seeking company.
Yet observers said both companies likely need the deal to close.
Western Liberty, which started its life two-and-a-half years ago as Global Consumer Acquisition Corp., initially raised $310 million in capital. Yet the New York-based company returned most of that to investors in November upon missing its deadline to close a deal and decided to go on in perpetuity.
In November, the company had $105 million in assets. As of the end of the first quarter, it has about $85 million left.
"They may have gotten rid of their deadline, but they are burning through money because they have no cash flow," said Michael Iannaccone, president of MDI Investments Inc. in Chicago.
Like most blank-check companies, Western Liberty has had a tough time breaking into the banking industry. In July 2009, the company had two deals in the works. It had planned to buy 21 Nevada branches from the $25 million-asset Colonial Bank in Montgomery, Ala., but that bank ended up failing. Western Liberty also had a deal to buy the $45 million-asset 1st Commerce Bank in North Las Vegas from the struggling Capitol Bancorp Ltd. That deal was terminated in November.
Community Bankers Acquisition Corp.'s takeover of two Virginia banks is believed to be the only instance of a blank-check company completing a deal for a bank. "They are extremely difficult to get done," Rockett said.
Yet in this case, Service1st also has incentive for the deal to close. The $210 million-asset de novo bank, which started in early 2007, has not yet turned a profit. It reported losses of $17.3 million in 2009 and $1.8 million in the first quarter.
The bank had noncurrent loans of 4.73% as of March 31, according to the Federal Deposit Insurance Corp., and the company has a $15 million portfolio of construction and development loans.
Still, Iannaccone said the bank, though unprofitable and coping with credit issues, it is not exactly a struggler. It is exceedingly well-capitalized, with a total risk-based capital ratio of 17.9% as of March 31, and also has been an aggressive reserve builder. "Its reserves exceed its nonperforming assets," he said. "That is monumental in this environment and particularly in that region."
Although the bank has enough capital to survive, Iannaccone said under current circumstances it would have difficulty growing. The $25 million that Western Liberty plans to invest could allow the bank to grow significantly.
"With their existing capital, they could maybe get to $300 million," Iannaccone said. "With the additional capital from Western Liberty, they will probably be able to make money going forward and potentially grow to $600 million."
Growth appears to be part of the recipe for the combined company and may have been the motivation for the changes to the deal.
"We believe the modifications to our agreement with Service1st allow both parties to move forward to pursue attractive opportunities," Jason N. Adler, chairman of Western Liberty, said in a press release last week.
Joey Warmenhoven, senior vice president of McAdams Wright Ragen, said the combined company could be flush with opportunities in the Las Vegas market.
"Nevada is going to take more time to recover. There are still more banks there that could potentially fail," Warmenhoven said. "There is tremendous opportunity for a bank with a lot of capital in Nevada."