Current Price – $0.94
Merger Consideration – $0.977
Upside – 4%
Expiration Date – October 4th, 2018
First Midwestern Bancorp (FMBI - regional bank) is offering to acquire Northern States Financial (local community bank with 8 branches) for 0.0369 in FMBI shares. Although the spread is small, I believe this transaction has very high likelihood to close shortly as seen with other microcap bank acquisitions. NSFC shareholder meeting is scheduled for 4th of October. Fed approval has already been received and thus spread is expected to narrow after the meeting.
First thing to note is that merger consideration depends on FMBI share price. $0.9775 fixed price is applicable if average FMBI share price on 20 trading days preceding 5th day prior to closing is greater than $26.49 (currently average closing price stands at $27 at c. 1.5xBV). If FMBI trades between $22.86-$26.49 merger consideration will be 0.0369 FMBI shares per each share of NSFC. This is important for hedging considerations, especially with FMBI hovering around the $26.49 threshold point.
Second thing is that NSFC does not file with SEC since 2013. Limited financial disclosures can be found on their investor relations page. It's being acquired at 1.75xBV and as many other small community banks does not seem to be operating efficiently (ROE before income taxes stands below 3%). So acquisition clearly to make sense for both sides and price looks fair.
The biggest question here is whether NSFC investor will vote in favor of the deal. A note in 2015 financial statements indicates that out of 92m currently outstanding shares majority were issued to previous preferred shares owners as well as to participants of 2014 private placement:
On April 30, 2014, the Treasury exchanged its Series A Preferred Stock (carrying amount $17.2 million), its right to accrued but unpaid dividends of $4.6 million and all of its warrants to purchase common stock (carrying amount $681,000) for 20,079,500 shares of common stock. On April 30, 2014, the Company completed a capital raise through a private placement, with investors acquiring all of the shares issued to the Treasury plus an additional 63,253,833 shares of common stock from the Company. These investors each own less than 5.0% of the outstanding shares of the Company’s voting stock of any class or series. Net cash proceeds to the Company were $18.9 million net of $1.8 million of offering costs of which $15.0 million was downstreamed to NorStates Bank.
This press release indicates slightly different amounts of funds raised but shows similar price per share paid:
The recapitalization was effected through a private placement of its common stock, primarily with institutional investors and with additional participation from certain directors, officers and existing shareholders <...> The Company's common stock was offered and sold for a per share price of $0.30 in a private transaction.
With current acquisition offer valuing the company at >3x private placement price just 4 years ago and management likely having consulted these investors (or even owning large chunks of stock themselves) before agreeing to the offer I think vote is already in the bag.
FMBI has completed a number of similar sized bank acquisition in Illinois over the recent years. The last few were closed promptly after receiving shareholder approval.
NSFC traded at $0.78 before the announcement, so downside of 17% if the deal fails.