FFMH Going Private Transaction - A Lucrative Arbitrage For Enterprising Investors.

| About: First Farmers (FFMH)

Summary

Shareholders owning fewer than 400 shares of First Farmers common stock will receive $ 30.25 in cash for each share.

Shares are trading in privately negotiated transactions for $28.

Downside protection - The bank purchased over 40k shares in 2015 through negotiated transactions with several third-party sellers at $29/share.

At the Annual Meeting of Shareholders (April 19, 2016), First Farmers & Merchants Bank (OTCPK:FFMH) shareholders will be asked to vote on a proposal to approve a "going private" transaction. The purpose of the merger is to reduce the number of First Farmers' shareholders of record to fewer than 1,200, which will permit First Farmers to suspend filing reports with the Securities and Exchange Commission, eliminating the burden and expense associated with those reports, and eliminate smaller shareholder accounts and the expense of maintaining those accounts. The company is expected to save $250,000 per year as a result of the deregistration of our common stock under the Exchange Act and suspension of our SEC filings. According to management, the Bank will continue to post financials on it's website.

If the merger agreement is approved and the merger is subsequently completed, shareholders owning fewer than 400 shares of First Farmers common stock will receive $ 30.25 in cash for each share they own as of the effective time of the merger. All other shares will remain outstanding and be unaffected by the merger.

Shareholders must hold less than 400 shares in record name (via Broadridge or certificate form), or the broker that you use must hold in aggregate less than 400 shares.

In regards to the fundamentals of the bank, see Main Street Fat Cat's write-up.

Shares are highly illiquid and must be purchased via privately negotiated transaction(s). However, for those who are still interested in purchasing shares, I'd recommend getting in touch with the sellers on FFMH's "For Sale Listing." I was able to purchase a lot of 399 shares and am aware of sellers who still have shares for sale for around $28. Once you've negotiated a price and method of payment with a seller, you have to mail a form to Broadridge financial solutions (FFMH's transfer agent).

As of April 6, 2016, arbitragers still have over 9 business days to complete the transaction. The shareholder's meeting is on April 19, 2016 where the effective date will be decided. You must be a shareholder before effective time of the merger.

Assuming you receive cash on April 30, 2016 and are able to purchase the shares at $28, this arbitrage should yield an 8% return or over 120% annualized.

Risks Mitigants
Shareholders could reject the going private transactions.

Shareholders are getting a good price for their shares. According to the analysis completed by Sheshunoff & Co. the fair value per share to be paid in connection with a proposed "going private," was valued based upon "Financial Control (going concern value)." According to Philip Saunders Associates, "acquiring a controlling share of ownership almost always requires a premium over the current market price per share."

The bank purchased over 40k shares in 2015 through negotiated transactions with several third-party sellers at $29/share. It seems even if the transaction falls through, the bank will continue to repurchase shares through negotiated transactions up until they are able to go private (reduction of the number of shareholders of record of common stock to less than 1,200).

Going private transaction costs more than the expected $3.4mm According to the 2015 10K, "Although it is not anticipated that we will need funds in excess of cash on hand to finance the merger, if additional funds are required, it is likely we will borrow such funds from the Federal Home Loan Bank of Cincinnati."

Regulators do not approve going private transaction.

Based on my conversations with another bank's management, regulators are given the opportunity to scrutinize the transactions after the PRE 14A is filled. Once the DEF 14A is filed, the regulators have essentially given the green light.
Click to enlarge

Disclosure: I am/we are long FFMH.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.