A Sure Bet: Independent Bank Corp. To Acquire Peoples Federal Bancshares

| About: Independent Bank (INDB)

Summary

Shareholders already approved the merger.

It will close in a few months and consequently offers a good opportunity for conservative investors.

The payment of dividends is not a problem.

Introduction

On Aug 5, 2014, Independent Bank Corp. ("Independent") (NASDAQ:INDB) entered into an Agreement and a Plan of Merger with Peoples Federal Bancshares, Inc. ("Peoples") (NASDAQ:PEOP). Under the terms and conditions of the agreement, Peoples shareholders will receive an amount of $21.00 in cash or will exchange 0.5523 shares of Independent for each share of Peoples. The deal is expected to be materialized in the first quarter of 2015.


Source: Merger Presentation

This article explains the rationale for the spread in this transaction. Also, we evaluate the conditions and the risk of the deal very carefully. Finally, we study the symmetry to conclude that it will turn to be a very good opportunity for a conservative investor.

Fundamentals

Independent Bank Corp. has already 78 offices in Boston. Peoples has 8 offices in the same area, which means higher cost synergies:

Source: Merger Presentation

The acquisition is financially attractive (up to $0.03 annual accretion to earning per share) and will strengthen the position of Independent in Boston. The strategic rationale is shown in the following slide:

Source: Merger Presentation

The most important assumptions are the cost saves (45%) and $8.8 MM in after tax restructuring charges. In addition, the market in this area very attractive since the median household income and the number of businesses are high:

Source: Merger Presentation

Deal Details

In order to make a quick review of the terms and conditions 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: Independent Bank Corp. to Acquire Peoples Federal Bancshares, Inc.

Buyer

Target

Nationality: U.S.

Private/Public: Public

Market cap/AUM: $1.00 B

Strategic/Financial: Strategic
Hostile: No

Nationality: U.S.
Price: $21.00 in cash or exc. of .5523 shares of INDB per share of PEOP

Market cap: $124.4 M
Sector: Banking

Conditions

Cash/stock: cash or stock

Premium: 12%

Termination fee: Company 4.2%

Shareholder vote: ok

Antitrust: HSR Act

Financing condition: No

Special conditions: No
Go-shop: No

No solicitation of transactions: Yes
Tax Opinions: yes

Press release / SEC Filing

Spread: 0.9%

Annualized Spread: 5.48%

Expected termination date: First quarter of 2015

Regulatory approvals

The conditions are typical excepting the antitrust:

Regulatory Approvals; No Burdensome Condition. All Regulatory Approvals and all other consents and approvals of a Governmental Authority required to consummate the Merger in the manner contemplated herein shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired or been terminated. None of such regulatory approvals shall impose any term, condition or restriction upon Buyer or any of its Subsidiaries that Buyer reasonably determines is a Burdensome Condition.

According to Michael D. Devins (Debevoise & Plimpton LLP), this term is sometimes subjective:

Sometimes the phrase "materially burdensome condition" is used. Often it is defined in some way, but sometimes those words are used without further definition. A buyer may ask for a more subjective standard such as "any condition that would materially impair the benefit of the transaction expected to be enjoyed by the buyer" or "any condition not reasonably acceptable to the buyer" and a seller may push for a higher standard such as "a condition that would cause a material adverse effect on the buyer.

In my opinion, this condition is not a problem. The bank is very small and the authorities will not stop the transaction. Finally, there is a condition under which the parties will need tax opinions relating to the merger. This is typical too:

Buyer and Company, respectively, shall have received opinions from Day Pitney LLP and Bingham McCutchen LLP, respectively, each dated as of the Closing Date, both in substance and form reasonably satisfactory to Company and Buyer, to the effect that, on the basis of the facts, representations and assumptions set forth in such opinions, the Merger will be treated for federal income tax purposes as a "reorganization" within the meaning of Section 368(a) of the Code. In rendering their opinions, each of Day Pitney LLP and Bingham McCutchen LLP may require and rely upon representations contained in certificates of officers of each of Company and Buyer.

Spread Calculation

The press release reads:

Under the terms of the Merger Agreement, each share of Peoples Bancshares common stock will convert at the effective time of the Merger into the right to receive either i) $21.00 in cash or ii) .5523 shares of Independent common stock. The Merger Agreement provides that 40% of the aggregate merger consideration must consist of cash and 60% of the aggregate merger consideration must consist of shares of Independent common stock.

This means that the deal will make a payment in cash and stock. Considering that the investors chose the optimal option, we can simulate the payment (40% paid in cash and 60% paid in stock). This ratio can change and in that case the ratio will be always better (more return). Taking into account the share of INDB, the spread is the following:

Source: Maudes Capital

For example, on Dec 29, 2014, the payment would be as under:

Offer = 21 * 0.4 + 0.6 * 43.38* 0.5523 = 8.4 + 14.37= $22.73

The spread is therefore:

(22.73/22.52 - 1) * 100 = 0.913%

The payment compared to the stock chart of Peoples is as under:


Source: Yahoo Finance; Maudes Capital

You can see that the spread decreases as conditions are waived off and we get closer to the termination date:

Source: Yahoo Finance; Maudes Capital

If the merger closes in two months, the spread is the following:

Source: Yahoo Finance; Maudes Capital

Dividends

Independent announced a quarterly dividend of $0.24 which will be payable on Jan 9, 2015, to shareholders on record as of the close of Dec 29, 2014. The record date was yesterday so the dividend is not included in the spread. Also, Peoples made a dividend payment last month, so we do not expect the next dividend payment to occur before the close of the deal.

Investment idea and conclusion

This deal is very interesting. The only problems we see are the regulatory approvals. The spread is very small, but since it will close soon, the profit is adequate. In addition, the premium is also very small (12%) -- which means that the potential loss is quite small -- You should buy PEOP if you are looking for a conservative investment.

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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