Understanding Deal Considerations

Transcription

1 Understanding Deal Considerations February 28, 2013 Jeff K. Davis, CFA Mercer Capital

2 About the Speaker Jeff K. Davis, CFA Jeff K. Davis is the Managing Director of Mercer Capital s Financial Institutions Group. Prior to rejoining Mercer Capital, Davis spent 13 years as a sell-side analyst providing coverage of publicly traded banks and specialty finance companies to institutional investors evaluating common equity and fixed income investment opportunities. Jeff was most recently Managing Director of Guggenheim Securities, LLC, and was previously head of the Financial Institutions Group at FTN Equity Capital Markets. While at Mercer Capital in the 1990s, Jeff led the firm s financial institutions practice, providing valuation and transaction advisory services. Jeff is a speaker at industry gatherings, including SNL Financial/University of Virginia s annual analyst training seminar, the ABA, various state banking meetings as well as security industry gatherings. Additionally, he regularly makes presentations to boards of directors and executive management teams. He is a periodic guest on CNBC, Bloomberg TV and Bloomberg Radio and is quoted in the American Banker, the Wall Street Journal, Reuters, Forbes and other media outlets. Presently, he is an editorial contributor to SNL Financial. About Mercer Capital Mercer Capital assists banks, thrifts, and credit unions with significant corporate valuation requirements, transactional advisory services, and other strategic decisions. Mercer Capital Experience Nationwide client base Clients range from smaller community banks with assets less than $50 million to the largest U.S. depositories Clients range from the rural to the metropolitan, the troubled to the most successful, and the simplest in terms of capital structure to the most complex More than 1,000 valuation opinions rendered for depositories Services for Depository Institutions Mercer Capital pairs analytical rigor with industry knowledge to deliver unique insight into issues facing depositories. These insights underpin the valuation analyses that are at the heart of Mercer Capital s services to depository institutions. Bank valuation Financial reporting for banks Goodwill impairment testing Litigation support Loan portfolio valuation Tax compliance Transaction advisory Contact a Mercer Capital professional at to discuss your needs in confidence.

3 Mercer Capital s 2013 Webinar Series Understanding Deal Considerations Evaluating the Consideration Cash Common Stock Acquirer publicly traded Acquirer privately-held Preferred Stock & Other Combination 368 tax-free exchange hurdles met? 2 1

4 Recent Deals Deal consideration for 124 bank deals (for which pricing information was available) since January 1, % majority cash 37% majority stock 11% other consideration (preferred, debt, or unclassified) Pricing not materially different between stock and cash consideration reflects low multiple environment Majority Cash 17.7x earnings; 1.17x Tangible BV Majority Stock 19.4x earnings; 1.16x Tangible BV 3 Deal Consideration 1,400 1,200 1, '93-'96 '97-'00 '01-'04 '05-'08 '09-2/26/13 Cash (100%) Stock (100%) Mixed Preponderance of consideration received by selling banks through 2000 consisted of 100% common shares due to the use of pooling accounting 4 2

5 Deal Consideration 1,400 1,200 1, '93-'96 '97-'00 '01-'04 '05-'08 '09-2/26/13 Cash (>50%) Stock (>50%) Other Cash more prevalent since 2001, but recent deals for larger community banks have entailed common equity given higher prices and need for buyers to limit the reduction in pro forma capital and minimize tangible BVPS dilution 5 Price to Tangible Book Multiples 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x '93-'96 '97-'00 '01-'04 '05-'08 '09-2/26/13 Cash > 50% Stock >50% Cash-is-cash, stock is not stretch pricing usually requires buyers to issue higher priced stock to achieve a higher absolute price (valuation) for the seller 6 3

6 Price to Earnings Multiples 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x '93-'96 '97-'00 '01-'04 '05-'08 '09-2/26/13 Cash > 50% Stock >50% Cash-is-cash, stock is not stretch pricing usually requires buyers to issue higher priced stock to achieve a higher absolute price (valuation) for the seller 7 Cash No questions about value limited or full auction conducted? Can the buyer finance? Have regulators approved an upstream dividend and/or is a capital raise necessary to close? Regulatory issue created by reduction in pro forma capital? Complete exit Maximum liquidity and control over reinvestment of proceeds No control over pro forma operation No shared merger upside going forward 8 4

7 Stock Shared upside in pro forma company Not a sale per se an investment in the acquirer s shares Key questions and considerations Due diligence on acquirer - especially credit - very important Pro forma ownership vs. contribution Pro forma change in EPS, TBVPS, DPS, etc. for seller (and buyer) Exchange ratio structure Value of the buyer s shares 9 Share Exchange Fixed exchange ratio Exchange ratio is fixed at the date of the definitive agreement Value floats with the buyer s share price Floating exchange ratio Value is fixed at the date of the definitive agreement Exchange ratio floats usually calculated based upon a 20- day average price of the buyer prior to closing Buyer and seller usually are protected with cuffs and collars whereby the exchange ratio locks at pre-determined prices 10 5

8 Cuffs and Collars Contractual agreements that tailor the economics beyond the fixed price or fixed exchange ratio agreement Can borrow from both fixed exchange ratio or fixed price deal economics Fixed ER exchange ratio remains fixed so long as acquirer s stock remains within a specified band (e.g. current stock price +/- 7%) Fixed price price remains fixed so long as acquirer s stock remains within a specified band (e.g. current stock price +/- 7%) Can tailor based on the performance of other financial measure (e.g. the performance of the buyer s shares vs. a bank index; or pool of nonperforming assets) Determining width of collar can be important if markets are volatile 11 Case Study: Fixed Price / Floating Exchange Ratio Fifth Third Bancorp (FITB) / First Charter Corporation (FCTR) FCTR Deal announced on August 15, 2007 Purchase price - $1.1 billion Multiples 2.9x TBV and 22x LTM EPS Deal consideration - 30% Cash / 70% Stock Exchange ratio fixed $31.00 per share $31 / avg FITB closing price over 5-trading days prior to closing Exchange ratio on August 22, 2007 was Implied pro forma ownership of FITB by FTCR shareholders of 3.8% Fairness opinion required to be affirmed for FCTR as a condition to close, not so for FITB 12 6

9 Case Study: Fixed Price / Floating Exchange Ratio Fifth Third Bancorp (FITB) / First Charter Corporation (FCTR) $40 $35 Share Price ($) $30 $25 $20 $15 $10 $5 $0 8/16/07 9/16/07 10/16/07 11/16/07 12/16/07 1/16/08 2/16/08 3/16/08 4/16/08 5/16/08 FCTR ($) FITB ($) FITB s share price fell 55% from announcement to closing fixed price exchange ratio $31 p/s did not have a lower bound collar (cuff) to protect FITB 13 Case Study: Fixed Price / Floating Exchange Ratio Fifth Third Bancorp (FITB) / First Charter Corporation (FCTR) FCTR Pro Forma Ownership of FITB 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% FCTR Discount to Closing Price 3.0% -30.0% 2.0% -35.0% 1.0% -40.0% 0.0% 8/23/07 9/23/07 10/23/07 11/23/07 12/23/07 1/23/08 2/23/08 3/23/08 4/23/08 5/23/ % FCTR Pro Forma Ownership of FITB FCTR Discount to Closing Price Definitive agreement did not require FITB to get an initial or updated fairness opinion as a condition to close if so, presumably GS would have withheld given doubling of FCTR s ownership to 8% of FITB 14 7

10 Buyer Multiples Seller Multiples Announce Date Buyer / Seller P/TBV P/E LTM P/E Fwd Est Deal Val ($M) P/TBV P/E LTM P/E Fwd Est Consideration Pro Forma Ownership Exchange Rate Buyer's Shares Other Comments 2/19/13 SCBT Financial Corp./ First Financial Holdings, Inc. 192% 21.3x 13.1x $ % 14.8x 15.3x 100% Stock 29% Fixed 8% Another in-market deal that provides for improved market share in key markets and expense saves; 2/6/13 Renasant / First M&F 157% 18.1x 15.4x $ % 23.3x 16.1x Mixed (30% Cash / 70% Stock) 20% Fixed 14% In-market deal that provides for improved market share in key markets and expense saves; 1/29/13 United Bankshares / Virginia Commerce 155% 23.5x 15.5x $ % 21.0x 16.8x 100% Stock Approx. 25% Fixed -3% Strategic deal that further shifts center of gravity to N. Va. from W. Va. 11/6/12 PacWest Bancorp / First California 172% 16.4x 11.8x $ % 21.1x NA 100% Stock Approx. 22% at announce Floating w/ a collar 20% EPS accretion 12% in first full year; FCAL to become 8th largest CA-based public bank 9/25/12 Columbia Banking / West Coast Bancorp 120% 16.0x 14.0x $ % 13.8x 21.4x Mixed (52% Cash/ 48% Stock) 24% Floating; No Collar but downside protection -10% 1st 6 wks should acquirers stock decline Investors disliked TBVPS earn-back, but 20/33% EPS accretion for FY13/14E. Portland/I-5 play 9/12/12 FirstMerit / Citizens Republic 164% 15.2x 14.2x $1, % 2.6x 4.3x 100% stock 33% Fixed -22% 1st 8 wks Significant footprint expansion; 6-8% FY14E EPS accretion. Street concern re: relative size and who FMER had to out-bid If the Acquirer is Publicly Traded Do not assume the public market is right, especially if thinly traded Treat sell-side estimates and views with skepticism or disregard Evaluation of the buyer s shares where and why different? Long-, intermediate- and short-term performance of shares vs. peers and indices? Do the shares have good institutional sponsorship? Historical, current and prospective liquidity (with the seller) Current and historical valuation on an absolute basis and relative to peers a high performer that trades for 20x EPS and 2.5x TBV may not be a good stock Historical financial performance on an absolute basis and relative to peers Growth potential Dividend history and potential Credit quality Capital adequacy and parent company capital structure 16 8

11 Why the relative out-performance over 5-years vs. 1 year? Trend in consensus earnings? Quarterly performance does not matter per se, but over/under performance may reflect Street consistently under/over estimating the subject s EPS and earning power Does a company that underperform peers and benchmark lessen the attractiveness of its shares for a seller? Is the valuation cheap, rich or inline with history and peers? x Historical P/E (LTM) and P/TB 20.0x LTM P/E 15.0x Why the reduction in valuation? 10.0x 5.0x 0.0x Is the reduction more or less than peers? Does the relative change in valuation explain under/ over performance in the shares vs. peers? Period 3.5x x 2.5x P/TBVPS 2.0x x Has the subject tended to trade rich or cheap to peers? 1.0x 0.5x 0.0x Period End 18 9

12 If the Acquirer is Private Valuation of the buyer s shares and evaluation of prospective performance Historical, current and prospective liquidity (with the seller) Attractiveness as an acquisition candidate Historical financial performance on an absolute basis and relative to peers Growth potential Dividend history and potential Credit quality Capital adequacy and parent company capital structure Appropriate valuation on near-term earnings and earning power, tangible BVPS secondary minority interest basis over-valuation leads to a bad outcome Prospective valuation if combined company produces projected EPS, growth in TBVPS what returns are implied for (both) shareholders 1, 3 and 5 years? 19 Prospective Acquirer #1 Prospective Acquirer #2 Last Ten Years Last Ten Years Low High Average YTD Low High Average YTD 0.76% 1.48% 1.04% 0.92% 0.17% 1.27% 0.80% 1.04% ROA ROE 7.7% 16.3% 11.1% 8.3% 1.9% 17.0% 9.2% 8.3% NIM 3.58% 4.39% 3.82% 3.69% 3.09% 4.23% 3.52% 4.23% Efficiency Ratio 47.0% 64.2% 59.2% 62.6% 57.9% 78.0% 68.6% 67.2% NCOs/Avg Loans 0.40% 1.36% 0.90% 0.53% 0.16% 1.37% 0.66% 0.16% NPAs/Loans & OREO 0.53% 3.41% 1.40% 1.40% 0.93% 3.52% 1.83% 3.52% CAGR CAGR Year Years 5 Years Years Year Years 5 Years Years Earnings Per Share 10.9% 10.7% -4.2% -3.8% 25.0% 89.3% -3.6% -5.5% Tangible BVPS 7.0% 0.4% 2.5% 1.2% 3.5% 3.4% 3.2% -0.5% Dividends Per Share 0.0% -5.7% -11.0% -4.0% 28.6% -6.5% -20.2% -5.3% Prospective Acquirer #3 Prospective Seller (Merger Partner) Last Ten Years Last Ten Years Low High Average YTD Low High Average YTD 0.17% 1.28% 0.84% 0.65% 0.98% 1.77% 1.28% 1.20% ROA ROE 1.8% 15.5% 9.7% 6.0% 7.7% 17.9% 12.4% 9.3% NIM 3.52% 4.15% 3.72% 3.57% 3.83% 4.85% 4.13% 4.09% Efficiency Ratio 59.5% 71.6% 64.5% 71.6% 48.0% 62.2% 55.9% 62.2% NCOs/Avg Loans 0.14% 1.89% 0.61% 0.67% 0.06% 1.01% 0.43% 0.29% NPAs/Loans & OREO 0.23% 5.43% 1.81% 3.78% 0.51% 3.65% 1.65% 1.33% CAGR CAGR Year Years 5 Years Years Year Years 5 Years Years Earnings Per Share 100.0% -3.1% -11.8% -4.3% 9.0% 12.8% -0.8% -0.7% Tangible BVPS 4.9% 1.3% 1.9% 2.2% 6.5% 6.4% 7.6% 4.1% Dividends Per Share -71.4% -64.3% -45.5% -23.8% 0.0% 0.0% 0.7% 4.1% Thorough evaluation of the prospective acquirer s financial performance Is the valuation consistent with the buyer s financial performance Why is the performance different vs. peers, etc.? 20 10

13 Other Considerations Certain other terms of the deal may become important Assumption of holding company debts (TARP, SBLF, TRUPs) Level of classified assets at closing vs. when the deal was struck Dividends pre-closing Change of control employment agreements Additional consideration paid out over time Composition of surviving board / management team Termination fee Deal expenses A fairness opinion and/or a second fairness opinion may be necessary as well (e.g., FCTR requirement vs. FITB s lack of) 21 Shared Upside of Profitability and Multiple Expansion 150% Price / Tangible Book Value (%) 140% 130% 120% 110% 100% 90% 80% Junior Bank Senior Bank Pro Forma Bank + Net expense saves + P/E Expansion = Large P/TB Expansion 70% 60% 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x 12.0x 12.5x 13.0x 13.5x 14.0x Source: Mercer Capital Price / Earnings (x) Multiple 22 11

14 Final Thoughts #1 determinant of return that investors and buyers control is the purchase price As a seller, price is a key consideration, but other terms of deal should not be overlooked especially if the transaction is structured as a stock swap Deal structure can bridge the pricing gap between buyers and seller Profitability x leverage x P/E = P/TBV buyers are acquiring earning power, not capital 23 Questions? Jeff K. Davis, CFA jeffdavis@mercercapital.com Mercer Capital 5100 Poplar Avenue, Suite 2600 Memphis, TN