Why Vail Banks Was a Steal For US Bancorp (VAIL, USB)

Includes: USB, VAIL
by: Jon Ogg

This morning the inevitable finally occurred. Vail Banks (VAIL) finally got a buyout offer. The price is a steal for US Bancorp (NYSE:USB). Terms of the agreement include a total cash purchase price of approximately $98.6 million, or $17.00 for each share of Vail Banks, Inc. common stock, which represents a premium to core deposits of 13.7 percent (according to the press release) and a 6% premium to yesterday's close.

Vail Banks, Inc., headquartered in Avon, Colorado, had consolidated assets of $705 million and $557 million in deposits, as of March 31, 2006. This company operates as the parent and holding company of WestStar Bank that operates 25 banking offices and 20 ATMs in 18 communities throughout Colorado.

Look where they operate: Aspen, Avon, Breckenridge, Cedaredge, Delta, Denver, Dillon, Edwards, Estes Park, Frisco, Glenwood Springs, Granby, Grand Junction, Gypsum, Montrose, Norwood, Telluride and Vail. Many of these are prime locations with very high-end income bracket customers in some key markets. Many of these areas are no longer just winter escapes for yuppies. The areas bring in tourism year-round and some of these destinations are THE choice spots for wealthy retirees and wealthy middle-aged people who do not suffer any major health conditions and who don't want to melt in the desert or don't want to flee several times per year when major tropical storms and hurricanes approach the Gulf of Mexico and the Southeast Coast. It isn't so much that the customers have all of their deposit assets at WestStar, but it is all of the local ancillary services that allow WestStar to pick up crumbs that would be considered hearty meals elsewhere.

This was a name that has been a member of my 'Bait Shop' for over a year, which is a list of companies that should be ripe as takeover candidates. That doesn't mean there was any foreknowledge of an imminent deal on this or others, but there was just no reason for some larger banking institution to not want this jewel. Bank of America was out of the picture because they are already at or too close to their deposit limit, but that left probably 10 or 20 other potential acquirers in the mix.

The only real issue on this was the size. Forget about the fact that Vail Banks trades at higher multiples than some peers. This buyout, even at the premium and after the recent strength in the stock, was just too small for most large banks to care, but this rationale was sheer nonsense for a larger regional or national bank with high-end customers.

This transaction is anticipated to be accretive to U.S. Bancorp earnings in 2007, and it could be for others as well. With it under the $100 Million total radar, it was just not worth the effort for many firms. What a pity. US Bancorp has a market cap of $55 Billion, and they didn't take this attitude.

I won't even bore you with the details of why this traded at a premium, because the stated multiples here just didn't matter. The regional footprint and demographics were what mattered, not the $98 million cost or an improved cost of $110 million or even $120 million. This amount of money is a pittance for any large bank and they should realize this.

I probably cannot issue an equivalent of a call to arms here to other banking institutions without knowledge of what the insiders would say, but if I could I would. Another banking institution should step up to the plate here and pony up more money. Have I said this enough? This is tiny and even if another bank has to overpay a tad it will not hurt them by any noticeable amount. This deal has already been approved by Vail's board according to the press release, but shareholders will at least get a token vote on a date to be determined. The insiders look to have a stranglehold with about 20% of the stock so it is unlikely that they petty shareholders will be able to put up a fight. But regardless another bank needs to step up to the plate here and offer more money.

This acquisition price of $17.00 cash will represent a new high, so it unlikely that anyone fights this. That is unfortunate, and if I was a holder I would rather own these shares here than take a 6% premium even if it is a new high. This acquisition should have really occurred long ago, but it is obvious that the insiders weren't going to just give this away and they probably wanted to wait until it was dynasty money.

Our take: Other banks missed the boat on this jewel, so hats off to US Bancorp. Someone was smart enough to realize the potential unlocked value in this regional bank, and it amazing that it isn't even going to cost them $100 million.