NIBC Holding (NIBC.AS) – Merger Arbitrage – 37% Upside

Current price: €7.21

Offer price: €9.85 (updated offer €7.53)

Upside: 37%

Expected closing: H2 2020

Press release

 

This is yet another merger that saw the spread explode from a tight 1-2% to 60%+ due to ongoing coronavirus situation. Following repeated assurances from Blackstone (the buyer) that the merger is still on track, the spread has narrowed, however the upside to buyout price still stands at 37%.

On the 25th of February Dutch bank holding company NIBC Holdings has agreed to be acquired by Blackstone. Consideration is €9.85/share in cash including €0.53/share to be paid in mid-April.

The offer is supported by the two largest NIBC shareholders (together own 75%), who have even agreed to sell their stakes privately at prices below the current offer (€8.93/share and €9.65/share including dividends). Regulatory approvals should not be an issue given that NBIC is a medium sized bank. The main risk is that Blackstone might drop the transaction, however so far it has confirmed two times already that the merger is still on (Mar 17 and Mar 24).

The offer is expected to commence in June/July after regulatory clearance is passed, while shareholder meeting should take place in early H2.

The main risk (and the reason for the spread) is Blackstone walking away - as noted above this risk has significantly diminished after two repeated reassurances.

 

Conditions

Current merger terms indicate 95% acceptance rate requirement. Given that the 75% of the votes have already been secured and taking into account that merger consideration implies 6% premium to an all-time high price of NIBC, the 95% threshold seems achievable especially in these turbulent times.

At the same time, if the offer ends up short of votes, but receives >85% approval (meaning that only 40% of the minority shareholders need to support it), merger parties would take certain pre-agreed "post-settlement restructuring measures" to transfer full bank ownership to Blackstone. The exact measures are not stated yet, but one given example is (press release):

NIBC could, among other things, sell and transfer all of its assets and liabilities to the Offeror and NIBC subsequently would be dissolved and liquidated.

It appears that this kind of pre-agreed alternative squeeze out measures are common in Dutch takeover practices (read more about it here and here). According to the press release, restructuring would be conditioned on the board, regulatory and shareholder approvals (threshold not clear). The update on the 17th of March stated that companies are making progress on the preparation of the asset sale and liquidation or other type of post-settlement restructuring measures agreement.

Regarding the regulatory matters - a consent from Netherlands Authority Financial Markets (AMF) and EU antitrust regulators are required. The update on the 24th of March noted that companies are preparing the filings and should submit with AMF by the 19th of May.

 

Valuation

NIBC is a holding company of NIBC bank - a medium sized commercial bank that focuses on corporate (53% of operating income) and retail (28%) segments. It operates in Netherlands (84%), Germany (13%), UK (1%) and Belgium (2%).

NIBC IPO (prospectus) was done in March'18 - 27% shares were sold at €8.75/share. A year later (March'19) a second offering was done at €8.40/share.

nibcFF

While these P/BV and PE multiples might appear way too low, actually most European banks tend to trade at a relatively (compared to American peers) large discount to book value - majority of them are valued somewhere around 0.4x-0.7x BV (source: Bain & Company). In light of these stats the offer at 0.78xBV seems reasonable.

The merger offer comes at only small premium to IPO and secondary prices, however that as well could be justified by the lack of growth in BV/share and slightly deteriorating profitability. Also these IPO/secondary prices kind of give support for the NIBC valuation and reduce the risk that merger terms will be renegotiated downwards.

Finally, given the fact that two major shareholders have agreed to exit at even lower prices, it is quite hard to argue that the offer is unfair for minority shareholder.

All in all, I do not expect shareholder approval to be a big risk here.

 

Selling Shareholders

Two largest NBIC shareholders, private investment firm J.C. Flowers & Co (60.6%) and a family run Dutch private equity investment company Reggeborgh (14.7%), have agreed to sell their stakes under separate agreements at €8.93/share and €9.65/share respectively (dividends included). JCF has owned the bank since 2005 and sold 27% in the IPO plus additional 13% in the second offering. Reggeborgh acquired its stake in the IPO and added more in the secondary offering.

The wide gap between considerations of JCF and Reggeborgh+minority shareholders are receiving is quite interesting and shows how eager was JCF to get out of the position. JCF was also given option to reinvest in the bank as minority shareholder but at a higher price (seems quite odd, but again might be common in Dutch M&A):

Certain existing JCF investors may reinvest indirectly in the Offeror at a price of EUR 9.26 per Share (equivalent to the overall blended price per Share to be paid by the Offeror), alongside the Blackstone Funds. This reinvestment would, in aggregate, represent an indirect investment in the ordinary share capital in the Offeror of up to 20%, depending on the amount JCF investors reinvest.

In the 24th of March update it was announced that JCF decided to skip on this 'lucrative' reinvestment opportunity.

24 COMMENTS

  1. lupolupus

    What do you think is the risk of Blackstone negotiating down the merger price, rather than walking away? As I understand, there is no formal merger offer yet, and given the current stock market declines they have a good argument for pushing for a lower price.

    1. Zulu Investor

      I find this to be a very attractive merger because the fundamentals of the company are pretty solid, along with a conservative valuation. It has had an ~11% ROE over the past three years with the TBV at ~.6x. The merger likelihood matters a lot less because I find this to be an undervalued company on its own. This implies an 18% annual return assuming TBV is 1x.

      If you ask me, I thought TGE closing, given the situation oil is in today, combined with its more sensitive position as a gas and oil pipeline company to have riskier prospects in closing. The cyclicality of TGE might be softened, given its main business is in the midstream section. I think we are really looking at a merger that has strong chances of closing given its the same company offering the merger agreements, and the fact that NIBC has arguably a better valuation and balance sheet.

      Heads I win, tails I don’t lose much…

      1. nostradamus

        Tails you will lose a lot imo. Banks are doing terrible in the current investment climate, and on top of this NIBC has quite a bit of oil exposure. If the deal breaks I’m convinced this thing will fall below where it traded as recently as mid march (4.50).

        Definitely not saying this is a bad trade, but don’t kid yourself into thinking you’ll be OK when it breaks.

      2. Zulu Investor

        Thanks for the perspective, Nostradamus. Appreciate it. I think there is some downside to this as well. You’re right about the oil exposure. I still think this has a very high chance of closing.

        IMO, what’s been going on right now should have limited impact to the intrinsic value of banks over the long run. There’s a lot of uncertainty in the short term, for sure. The other thing that can be a concern is if this is a prolonged situation and the loss provisions banks have set aside are actually realized or worse, exceed expected losses.

    1. dt

      Translated in English:

      Blackstone and NIBC have to talk to each other again
      Tuesday, April 28, 2020 8:51 AM

      NIBC has to reunite with Blackstone to discuss the terms of the deal, following the corona crisis. The intended buyer announced this on Tuesday morning.

      Because of the corona crisis, the conditions in the takeover deal have changed.

      Among other things, NIBC decided to postpone the payment of the final dividend to the second half of this year and there is a chance that the dividend will not be paid at all. The acquisition price of Blackstone is cum-dividend, and the acquisition protocol agreed between NIBC and Blackstone requires that new arrangements be made on this change of business.

      The corona virus has also created “substantial” uncertainty regarding the transaction-related business case, Blackstone said.

      Both parties will talk about this and look for solutions in the coming weeks. NIBC and Blackstone will provide more information by May 19.

  2. over2u

    Press-release by Blackstone:
    https://www.blackstone.com/the-firm/press-releases/article/update-on-public-offer-for-all-nibc-shares

    My take-aways:
    – Blacktone wants either to receive dividends or adjust the Purchase price, which is fair
    – Transaction related business plan does not reflect the current market situation (post-covid). From the wording of the statement, it looks more like a formality than a business problem.

    Merger protocol:
    https://www.nibc.com/media/2613/merger-protocol-flora-acquisition-bv-and-nibc.pdf

    1. Zulu Investor

      You think it’s a formality issue? They said that financing isn’t guaranteed since NIBC postponed dividends. Maybe there’s more we aren’t seeing. The adjustment part I find concerning. I am not sure if they will just “adjust” for the delayed dividends, but possibly much more.

      Material adverse changes can also be another reason. Given the current environment, its possible they may want to adjust the price by more than just the dividends alone. I admit I may have to rethink on this investment. I still think it will go through, but to what extent the price and terms will be adjusted remains in the mist.

      1. over2u

        – I don’t think the MAC clause is relevant here, as you need to prove that the company suffered more than the industry in which it operates.
        – On adjustment – if I were Blackstone, I would definitely renegotiate the price to reflect the hit on financials.

  3. Daniel

    What’s Blackstone’s angle here? Why are they so focussed on the details regarding deal structure etc?

    I think this is important for handicapping it, because it allows us to work out what will be most important for them and what the regulators will be looking at

    1. Writser

      Well, I think that’s pretty simple Daniel. Look at a few other Dutch banks. ING: down 50% YTD. ABN Amro: even more. Van Lanschot (mostly private banking): down 30%. These banks are expected to take a big hit due to Corona.

      Yet Blackstone has agreed to buy NIBC at a 30% premium to the price at the start of the year. I think you can safely say that that is a terrible deal as of now. But a pandemic is explicitly stated as not being a valid reason to cancel this merger. So Blackstone is focusing on some other details to try to wiggle out of the deal. Or to pressure the sellers into lowering the price.

      Obviously in the real world the dividend doesn’t matter at all: Blackstone has gazillions under management and whether they buy a bank at $1070m that has not paid out $70m in dividends (and thus has the cash still in its bank accounts) or whether they buy a back for $1000m that has paid out a $70m dividend is totally immaterial to them. But you try what you can try ..

      Same with the regulatory issues: if you really WANT to buy NIBC I think the regulatory situation is basically the same as it was a few months ago. Shouldn’t be a problem. Tiny bank. But if you want to wriggle out of the deal you can say to the regulator: “you know, I think we have to fire a lot of people… And with COVID we don’t know if our compliance department can do its job in the future”. Again, if you can pretend that you tried to get the deal to completion but regulators blocked the deal then you can wriggle out; even though that’s not quite exactly what happened.

      The bad news is that Blackstone IS trying to wiggle out: as opposed to the (much larger) TGE deal where the market had its doubts but Blackstone kept confirming it would comply with the original merger agreement. That deal closed already but here they are stirring up some trouble. I think Blackstone has a pretty weak case. On top of that the sellers are mostly large private equity vehicles – I don’t think they will get scared that easily. Maybe they will accommodate Blackstone a little bit by lowering the price. I think I like the risk/reward and own some shares. Still, there is a (hard to quantify) chance that Blackstone will do everything possible to get away from this deal and that they succeed. Size accordingly.

      1. over2u

        I agree with your view. I think Blackstone is pushing for a price discount. If NIBC agrees on 20%, that is still a great deal.

      2. Daniel

        Sorry when I said “what’s Blackstone’s angle” it wasn’t regarding their current negotating tactics – that is quite clear.

        It was referring to what is their angle in buying NIBC in the first place? Do they plan on using it as a platform to acquire other small banks across the DACH region? Acquiring a small bank doesn’t fit the normal PE playbook, so I’d be interested if anyone has any thoughts on why they’re interested in this deal

        I think this is important to think about, because it could provide clarity on what they’re saying regarding the regulator potentially having issues with their plan now

  4. nmeile87

    Maybe the rationale for a significant move this afternoon:
    https://fd.nl/ondernemen/1344972/rechter-private-equity-mag-corona-niet-gebruiken-om-onder-deal-uit-te-komen

    Translation:
    “A private equity house in the Netherlands has tried to excuse corona as an excuse under a takeover, but has been deceived in court. This is evident from a not yet public verdict delivered this week.

    It concerns investment company Nordian Capital and the acquisition of J-Club International. This company from Almere sells earrings, bracelets, scarves and other accessories through thousands of shelves in department stores all over Europe. J-Club lost a large part of its turnover in March due to the forced store closings in many countries.

    The deal was signed at the end of February, shortly before the corona crisis erupted in Europe.
    NIBC deal also uncertain
    It is the first time in the Netherlands that a judge has had to consider a takeover by private equity that has been called into question by corona. There is a real chance that this will also happen with the acquisition of the Dutch bank NIBC by the American investor Blackstone.

    Blackstone made an offer in February for the listed NIBC. This deal seemed to be well-sealed, but in late April he was unsettled. NIBC had recently suspended the dividend, at the urging of the European Central Bank. Then the wealthy Blackstone said it could no longer afford the deal and that the parties would have to talk again. Tuesday will be more clear on this matter. Then the deadline for submitting the offer notice from Blackstone to stock watchdog AFM will expire.”

  5. DavidW

    Pursuant to the proposed amendments, the offer price payable to all shareholders, including JCF and Reggeborgh, would be reduced to EUR 7.00 per Share. In addition, as announced by NIBC on 18 May 2020, public shareholders would receive NIBC’s final dividend of EUR 0.53 per Share for the financial year 2019, which would be paid unconditionally before settlement of the Offer, and would result in public shareholders receiving EUR 7.53 per Share, in aggregate. JCF and Reggeborgh would have the right to collect the final dividend of EUR 0.53 per Share, subject to the conditional waiver announced by NIBC on 18 May 2020.

    The other proposed amendment would be an obligation on the Offeror to pay liquidated damages of EUR 46 million in total as the only remedy and recourse against the Offeror in certain circumstances where the Offer is not declared unconditional because regulatory clearances are not obtained and in certain other cases.

    –> I don’t think BX will be able to walk away and only pay €46M in damages. In order to break a contract like that you need strong evidence that NIBC’s business has been severely impaired, and even then it’s uncertain they simply aren’t the ones liable for it.

    I do think that by far the most likely scenario is them agreeing on this amended offer. However at current price with this much uncertainty around the downside and timeline I’m not convinced it’s that great of a deal atm.

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