National Penn Bancshares Is Merging Into BB&T: What Should A Shareholder Do?

| About: National Penn (NPBC)

Summary

Doing nothing is the worst option.

At current prices it is best to elect $13.00 per share cash.

Only 30% of National Penn Bancshares shares can be cashed out.

The Choice

The shareholders of National Penn Bancshares (NASDAQ:NPBC)

  • Can do nothing,
  • Elect to receive 0.3206 shares of BB&T stock per share of NPBC,
  • Elect to receive $13 in cash per share,
  • Elect to receive a combination of cash and BB&T stock or
  • Sell their shares.

Because BB&T's (NYSE:BBT) merger with National Penn is expected to close on or about April 1, 2016, there is not much time left to wait. The deadline to elect the form of consideration is 5 p.m., ET, on March 30, 2016, unless extended.

The optimal choice depends on the share prices of NPBC and BB&T and the choices made by other shareholders.

I will not consider tax issues. So please be aware your situation and thereby optimal choice may be different.

With BBT currently trading at $34.40, the stock consideration would equal $34.40 x 0.3206 = $11.03 per share of NPBC. This is less than the share price of NPBC of $11.66. This means opting for the stock consideration makes no sense, because you could sell your shares for about $11.66.

A combination of stock and cash also makes no sense because stock consideration made no sense.

Therefore the $13 cash looks like the best option. Wouldn't it be nice to even buy more NPBC for $11.66 and cash out at $13? The problem is that the cash consideration is very likely prorated because a maximum of 30% of the shares can be cashed out at $13. This means if all shareholders elect the cash option, 30% of every single shareholder's shares would be cashed out and 70% converted into BB&T stock. If you select the cash option and less than 100% of the remaining shareholders elect the cash option, you will receive the cash for more than 30% of your shares. This means the lower the amount of shares for which the cash consideration is elected the more attractive the cash option becomes at current prices. The problem is we do not know beforehand how many shareholders elect to receive cash despite it being the better choice.

The worst case scenario for the cash election would be if you select the cash option and every other shareholder does the same. You would receive 0.3 x $13 = $3.90 cash and 0.7 x 0.3206 x 34.40 = $7.72 in BBT stock. This would total $11.62, which is less than the current share price of $11.66.

Therefore whether selling the stock right away or electing to receive $13 per share is the better choice depends on the proration factor.

Although Yahoo Finance has 73% of Shares Held by Institutional & Mutual Fund Owners, whom one would expect to elect rationally. To equal the value of selling shares right away at $11.66 one would need at least 32.03% of the shares to be accepted for cash. I expect more than this number to accepted for cash and think the cash consideration is superior to selling shares.

Doing nothing is no good choice because if for at least 30% of the shares the cash election is made, Non-Election Shares would receive only the stock consideration.

I have built a self-updating Google spreadsheet with at least near time prices. You can access it here.

Conclusion

I would opt for the cash consideration at current prices, because I do not expect every other shareholder to opt for the cash consideration. It is also wise to make the choice as late as possible depending on the then prevailing market prices. The latest date you can submit your choice would typically vary from broker to broker. Because I have not done extensive work on BB&T, I would sell the BB&T shares I would get as part of the share consideration due to proration.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NPBC over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Depending on the evolvement of the prices there could be a possible arbitrage opportunity in NPBC/BBT in the near future.