- Rangeley Capital is an owner of OBA Financial as Disclosed in SEC filings.
- We have advocated for the sale of OBA to its board and management.
- This was a top investment idea in early 2010. Here is why it remains attractive in early 2013.
On Thursday, January 21, 2010, OBA Financial Services Inc. (NASDAQ:OBAF) closed its stock offering at $10 per share. Shares are up over 80% since that date, but there is a significant opportunity ahead for investors still interested in this financial institution. Specifically, there is a moratorium on selling a bank following such a stock offering that lasts for three years. It ran out this week, allowing OBAF to sell to the highest bidder whenever they would like.
A healthy institution such as OBAF could attract a takeover offer from any number of bidders. There are approximately six strategic buyers that could easily absorb OBAF. They could take out costs in order to justify a large premium. A deal struck at 120% of tangible book value would equal about $22 per share for OBAF, which is currently trading around $18 per share.
It is likely that there will be a deal in the near-term and it is likely that such a deal will reward shareholders. For more specifics on our assumptions, we used a $15 downside, $22 upside, 90% chance of a sale, and a deal by the end of this current quarter. The risk-adjusted value comes in at slightly over $21. The expected value return is around 18% and the return to the upside scenario is over 20% from here. I allocated 2% of my equity to this investment based on these premises.
This is a short description because it is a simple idea. However, it is one way to seize the opportunity of banking consolidation, which is likely to continue to reward investors this year. We own between 5-10% of SSE-OLD, which is up by over 80% so far year to date after its acquisition was announced last week. Our hope and expectation is for several more deals this year. OBAF is our best candidate for the next announcement.
Why OBAF? They were not allowed to sell until this week. Now they can. Even with a substantial deal premium, they will have a market capitalization of slightly under $100 million, which is too small to be competitive give the expensive regulatory burden placed on small publicly traded banks. There will be many more examples of deal targets in 2013 from which to choose, but this one is likely to be in the vanguard. We are likely to learn more when the company reports earnings within the next few weeks.
Additional disclosure: As of Friday, January 11, 2013, public filings indicate that we own over 5% of SSE. We have since increased that position. Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.