Low-Risk Opportunity In Piedmont's Tender Offer For Crescent Financial

| About: VantageSouth Bancshares, (VSB)

On Tuesday November 8th, Piedmont Community Bank Holdings (a privately owned bank holding company) announced a tender offer (pdf) for shares of Crescent Financial (NASDAQ:CRFN), a bank holding company that owns Crescent State Bank at $4.75 per share in cash. The tender offer expires December 7 2011. As shares of CRFN are trading at $4.33 as of this article, this is an extremely low-risk investment paying 9.7% in just one month.

Details of the Tender Offer. Piedmont is offering to buy any number of shares up to a maximum of 6.44 million shares or 66% of the currently outstanding shares. There is no minimum number of shares that need to be tendered for the TO to be consummated. Crescent will not become a fully owned subsidiary of Piedmont and Crescent stock will continue to trade on the NASDAQ. If more than 6.44 million shares are tendered by shareholders, Piedmont will buy shares on a pro rated basis. The tender offer is part of an investment agreement between Piedmont and Crescent Bank first announced on February 23 2011. The tender offer's completion is subject to the other parts of the investment agreement being fulfilled.

The Investment Agreement (pdf). On February 23 Crescent Bank announced an investment agreement with Piedmont where:

  • Piedmont will invest $75 Million in Crescent by purchasing 18.8 million newly issued Crescent shares at $4 per share;
  • Crescent Financial is to reincorporate in Delaware;
  • Piedmont will offer $4.75 to existing Crescent shareholders in a tender offer;

The investment agreement is subject to the following conditions among others:

  • Approval by Crescent shareholders for (A) the issuance of new shares and their sale to Piedmont; (B) reincorporation in the state of Delaware;
  • Approval by bank regulators, namely the Federal Reserve Bank and the N Carolina Commissioner of Banks.

The only reason for the tender offer is to sweeten the deal for existing Crescent shareholders. If Piedmont purchases 18.8 million new Crescent shares it would hold 2/3 of the float (there are only about 9.6M Crescent shares currently outstanding). Obviously, this would dilute the holdings of current shareholders by a factor of 3 to 1 so current stock holders would not be happy with that deal. Since their approval is needed, Piedmont is giving them a great incentive to support the deal by offering to buy 66.67% of the current float at $4.75, allowing shareholders to cash out at over 100% premium above the price in February before the Investment Agreement was announced.

Not suprisingly, at a special Crescent shareholder meeting held on June 7, owners of CRFN overwhelmingly voted "for" the Investment Agreement, including issuing of the new shares, their sale to Piedmont and the reincorporation of Crescent as a DE corporation.

Approval for Piedmont's majority investment in Crescent Financial was received from the Richmond Federal Reserve on October 21. N Carolina Commissioner of Banks issued a non-objection on October 24.

As all the required approvals were now in place the tender offer was commenced soon after. The reincorporation in DE is scheduled to take place after the beginning of the TO but before its expiration on December 7.

About the investor and the financing of the tender offer. Piedmont Community is a private bank holding company in North Carolina. It is in good standing with the bank regulatory authorities and registered with the Federal Reserve System. Piedmont currently owns a majority stake in VantageSouth Bank, and all the shares of Community Bank of Rowan; both are North Carolina - chartered banks. Piedmont is not relying on third-party financing for completing the tender offer. The necessary amount of $30.6M is available in cash from Piedmont's working capital and has been deposited in escrow until the expiration of the tender offer.

Summary. What I liked about this deal is that virtually all conditions had been satisfied before the tender offer began. The TO is not conditioned on any minimum number of shares tendered or on third-party financing. Regulators' approval and shareholders' support has been secured. Compare that with the tender offer for Orchid Cellmark (NASDAQ:ORCH) where acquirer LabCorp is extending the expiration date for the 7th (seventh !) time as it is struggling to obtain FTC approval for the deal. Overall, the Crescent TO is a nice clean deal where very little could go wrong at this point.

Some investors will rightly note that the opportunity to make almost 10% in CRFN in just one month sounds too good to be true and if the deal was really a slam dunk the price should have climbed a lot closer to the offer price of $4.75 by now. After all, there are many smart professionals on Wall St involved in Risk Arbitrage (buying merger stocks). In my opinion big Wall Street M&A arbs will not be interested in getting involved in the Crescent TO as the deal is too small (the entire deal is just $30M) and the stock too illiquid (average volume just 30K shares daily) for them to be able to make any meaningful investment in Crescent. As for my money, I am already in CRFN and will continue to buy more if the stock stays at these levels.

Disclosure: I am long CRFN.