Ben Franklin Bank (BFFI) – Merger Arbitrage – 6% Upside

Current Price: $9.92

Merger Consideration: $10.33 – $10.70

Upside: 4% – 8%

Expiration Date: early 2020


This is an  illiquid (avg. volume $3k – $4k per day) nano cap ($3m) bank merger with very limited available information as the buyer is a private credit union and the target is listed on OTC. This situation is very similar to WEIN.

Corporate America Family Credit Union (CAFCU) is acquiring Ben Franklin Bank. Transaction has been approved by the board and is still subject to Ben Franklin stockholders approval (no info available on shareholder base). The price is set at $10.33 – $10.70/share (two year high) in cash.

Downside to pre-announcement price stands at 27%, but might be larger due to recent poor quarterly results.


Merger consideration

Aside from being listed on pink sheets and low liquidity, the main reason for the spread might be uncertainty regarding the final price of the consideration.

According to the PR eventual price will depend on several things:

  • BFFI’s ability to meet the minimum equity target at closing;
  • Taxes;
  • Costs related to terminating the existence of Ben Franklin Bank and Ben Franklin Financial and distributing the remaining assets to stockholders.
  • Other costs (employee compensation, benefits etc).

None of these factors are explained in greater detail the in press release and merger agreement is nowhere to be found. So currently it is hard to tell to what degree the above points are already reflected in the merger consideration range ($10.33-$10.70/share). In other words – currently there’s no way to estimate the worst case scenario.

One more (and likely most important) factor that might influence merger consideration is uncertainty regarding the required treatment of the liquidation account. For both cases (BFFI and WEIN) the banks used to be a mutual holding companies and after the conversion to conventional bank they had to create a liquidation account. A liquidation account represents the potential interest of eligible account holders and supplemental eligible account holders in the mutual holding company’s net worth at the time of conversion (source). The main question here is whether the funds from that account will have to be distributed to depositors or not. This apparently could make a significant impact on the merger consideration (press release) but again it is not clear to what degree this is already reflected in the indicated range.

Since the sale of assets and liabilities to a credit union by an institution which had converted from mutual to stock form under the current federal rules has not yet been implemented by any other institution, there are certain uncertainties associated with the treatment of the liquidation account. As a result, we cannot predict at this time whether the organization will be required to distribute the remaining liquidation account to certain depositors.

So if eventually it appears that the funds from a liquidation account need to be distributed to the depositors, it can negatively impact the consideration. Any additional info on this is not available, not even the actual size of the liquidation account.


Short background on the companies

Ben Franklin Bank has two branches in Illinois and a total of $100m in assets (Q2 ‘19). It is constantly unprofitable – brings about $1m net losses annually (2018 was slightly better). Merger consideration values the bank at around 1.30x TBV (high end), which is considerably lower compared to average Midwest bank M&A multiple (1.67x here and 1.60x here). But again this is a 2 branch loss making bank, so it probably deserves lower than average multiple. Looking from the historical P/TBV perspective the current offer price looks fair.


CAFCU provides consumer and real estate loans. They have 20 branches out of which 10 are in the same part of Illinois as BFFI. I haven’t been able to find any other acquisitions made by it.

Annotation 2020-01-09 172526

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