Commerce Bank of Temecula Valley (CKTM) – Merger Arbitrage – 7% upside

Current Price – $13.45

Expected Payout – $14.41

Upside – 7%

Expiration Date – mid 2018

Acquisition Announcement

This idea was shared by Thinley.

 

Nano Financial Holdings is offering to acquire Californian bank CKTM at $14.41 per share (59% premium to pre-announcement price). Current spread stands at 7.1%. Transaction is expected to close in mid 2018.

Nano is a special purpose acquisition vehicle (not listed) that was established in 2017 and already raised $60m in stock subscriptions. It’s stated purpose is to acquire one or more commercial banks in California. Nano is run by Mark Rebal who recently (2016) sold his managed Californian Republic Bank – capitalization of $52m at inception in 2007 and $290m at the time of sale in 2016. So Nano seems to have been created so that Rebal can repeat his playbook of growing Californian Banks. Rebal’s expertise coupled with already available financing suggests that Nano is unlikely to walk away from the transaction.

CKTM is being acquired at 1.8x 2016 BV, 58x estimated of earnings (based on latest financials), which seems to be a rather fair valuation relative to other bank acquisition deals in the West Coast (1.66-1.87x BV).

Transaction is subject to CKTM shareholder approval. Also quite importantly part of consideration will be paid in Nano stock (not listed yet and no valuation/exchange ratio indicated), but only for ‘accredited investors’. From press release:

“In order to preserve and protect the goodwill of CBTV, in conjunction with entering into the Definitive Agreement Nano requested that certain accredited CBTV shareholders agree to exchange a portion of their CBTV shares of common stock for newly issued shares of Nano Class A Common Stock (“Exchange”) estimated to be not less than 25% and up to 49% of the total number of outstanding shares of CBTV common stock.”

This stock part of acquisition and ambiguity around it (i.e. will retail investors also receive Nano stock as part of consideration) is likely the main reason for the spread to exists.

My understanding is that smaller retail shareholders will receive cash only and accredited investors current insiders/management who will continue to be invested in the bank through Nano stock ownership.. However, I do not have any breakdown of CKTM shareholder base, so this is a bit of speculation.

Published on: January 5, 2018  •  Published by:
Category: Member Ideas

12 COMMENTS

  1. davea500

    thanks, Thinley. Could you find any public info about Nano that was useful?

    1. Jesse

      Here’s their website: https://www.nanobanc.com/ . The S&P article under press releases is worth reading.. having trouble linking. It notes that “In a Sept. 15, 2017, Form D filed with the Securities and Exchange Commission, the company disclosed that it was raising $150 million in equity. Cappello said the company has raised more than $60 million in stock subscriptions and is on track to raise about $200 million.” If you go to edgar, the Form D itself says they’re raising $150M but says $0 has been raised so far. It also notes that “In April 2017, AltaPacific Bancorp terminated its deal with Commerce Bank, after Commerce Bank shareholders rejected the $15.9 million cash-and-stock transaction. That deal was valued at 128.8% of book and tangible book. The Nano deal is valued at 173.4%, according to SNL calculations.”

      Looks like part of the spread may be the failed deal with AltaPacific. I like this one. Seems like enough of a premium that the deal likely closes. I have a small position now… may buy more.

  2. Michael Lax

    I put in a limit order of $13,30, which is the range it has been trading in the last few days, so far no fill.

  3. thinleyw

    An article on AB (https://www.americanbanker.com/news/upstarts-first-step-in-testing-fraud-product-buy-a-bank) indicates that the BOD of CKTM believe Nano is able to raise or has raised $60mm in less than 3 months.

    “Nano’s wire transfer technology really wasn’t a factor behind the $77 million-asset Commerce’s decision to sell, said Scott Andrews, the bank’s president and CEO. Instead, the deal’s price of 1.7 times tangible book value and Nano’s ability to raise $60 million in 10 weeks made the difference.”

    Also, nano is raising the funds by marketing the purchase of CKTM as a platform for a fraud product.

  4. thinleyw

    A friend of mine sent me some material info. The federal reserve bank returned the application that was filed by Nano.

      1. thinleyw

        According to him, at the very least a delay. Other than that I’m not quite sure.

    1. dt

      Merger approved by shareholders, spread has narrowed to 1.5%.
      Thanks for sharing this!

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