On Nov. 17, 2014, BNC Bancorp (BNCN) ("BNC") and Valley Financial Corporation (NASDAQ:VYFC) ("Valley") announced the signing of a definitive agreement under which BNC will acquire all the common stock of Valley for a fixed price of $20.50 per share payable in shares of BNC. The transaction is expected to close in the second quarter of 2015.
There are good articles about written by Profit Fan -- which covered the target before the announcement --. He also commented about the merger:
"Post acquisition, BNC will have ~$5 billion in assets and 60 banking offices throughout North Carolina, South Carolina and Virginia. In addition to the new revenue streams, BNC is sure to boost the profitability of Valley's assets by reducing now unnecessary debt, and by looking for ways to grow services provided to its new customer base. A win-win really, but I have to say I'm a little sad that stealing away Valley shares from the market is now off of the table"
As usual we will care about the terms of the merger agreement in this article. The fundamental analysis is very important before the announcement but not so much after it.
In order to make a quick review of the terms of the transaction I have prepared the following table including: the type of buyer and the type of target with links to find information about them, the conditions and the potential profit.
|Transaction: BNC Bancorp and Valley to Merge|
Market cap/AUM: $493M
Day of announcement: +1.49%
Market cap: $95.5 M
Cash/stock: fixed price - payment with stock
Termination fee: target 3.6%
Merger approval: 50%
Antitrust: HSR Act
Financing condition: No
Special conditions: No
No solicitation of transactions: Yes
12/8/2014 Spread: 3.48 %
12/8/2014 Annualized Spread: 6.82 %
Expected termination date: second quarter 2015
The press release reads:
"Under the terms of the agreement, which has been approved by the Boards of Directors of both companies, Valley shareholders will receive a fixed price of $20.50 for each share of Valley common stock, payable in shares of BNC common stock based upon the 20-day volume weighted average price of BNC common stock prior to the closing of the merger, subject to minimum and maximum exchange ratios"
This does not mean that the payment will be always $20.50 but that the payment depends on the following scenarios:
If the VWAP immediately prior to the merger is greater than or equal to $18.50 then each share of Valley common stock shall be converted into 1.1081 shares of BNC common stock (the "Minimum Exchange Ratio").
As an example if yesterday's close of BNC common stock was above $18.50:
Payment when BNC equals $18.50 = 1.1081*$18.50 = $20.50.
Payment when BNC < $18.80 = 1.1081*$18.80 = $20.83.
This is not the case today since BNC's common stock is not higher than $18.50.
If the VWAP immediately prior to the merger is less than $14.25, then each share of Valley common stock shall be converted into 1.4386 shares of BNC common stock (the "Maximum Exchange Ratio")"
As an example if yesterday's close of BNC common stock was below $14.25:
Payment when BNC equals $14.25 = 1.4386 *$14.25 = $20.50
Payment when BNC < $14.25 = 1.4386*$14.00 = $20.14
This is not the case today since BNC's common stock is not less than $14.25. Today the payment would be $20.50 as the price of BNC's common stock ($16.73) is below above $14.25 and below $18.80. The spread is then calculated as follows:
((20.50/19.81)-1)*100 = 3.48%
Just taking a look at BNC's stock, it is almost as high as in 2007 so we should watch out. In case of falling below $14.25 we would be paid less.
Source: Yahoo Finance
How do we explain the spread?
The first remarkable fact about this deal is that it will be long. The regulatory approvals will take time. In addition, the premium is quite high, which is a proof of a long bidding process before the announcement (the confirmation is also the big 3.6% termination fee). Finally, the fact that the merger is small makes many of the large merger funds stay away. These factors are making the spread very large and I do not expect this to change.
Investment idea and conclusion
As the analyst Profit Fan, I think that the price offered is quite high. The 46% premium is not normal in this kind of deals between banks and I do not like investing in overvalued mergers. Many things can go wrong.
In addition, the market did not react to the merger the day of announcement which is for me a very important motivation. The merger is great in terms of fundamental value but BNC is overpaying.
Source: Yahoo Finance
I would not arbitrage this merger and even I would recommend to short-sell Valley. This idea is not as bad since you can lose only 3.6% but earn a 46% return.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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