Empire Bancorp (EMPK) – Merger Arbitrage – 15% Upside

Current Price: $9.50

Current Offer: $10.97

Upside: 15%

Expected Closing Date: Q2 / Early Q3

Presentation

This idea was shared by Duncan.

 

Another tiny bank acquisition. Liquidity is limited.

Empire Bancorp is being acquired by Flushing Financial for either 0.6548 FFIC per each EMPK share or C$14.04/share in cash (at least 50% of the consideration should still be in stock). Borrow is available and cheap (annual fee = 0.37%).

Both regulatory and shareholder approvals were received by the end of February. Transaction was supposed to close in the beginning of April, however due to the current COVID-19 situation it was adjourned (23 Mar) to Q2/early Q3 or earlier if business and market conditions stabilize. Both companies have noted that they remain committed to the merger. The delay seems legitimate and is likely caused by the actual lockdown in New York, where both companies are located, rather than buyer's willingness to cancel the deal.

Overall the transaction seems beneficial to the buyer and makes sense from geographical and cost efficiency perspectives.

Before the market fall EMPK was trading at 1-2% spread.

 

Additional points

FFIF has $7bn of total assets and 19 branches in Queens, Brooklyn, Manhattan, and on Long Island.

FFIC

EMPK, on the other hand has close to $1bn in total assets and operates 4 branches in Long Island.

EMPK

FFIC operates with considerably higher efficiency than EMPK (66% vs 82% respectively). Eventually FFIC expects to cut 50% of EMPK noninterest expenses increasing the pro forma profitability of the company.

Pro forma empk

Note: Taken from merger presentation (25 Oct'19)

It also doesn't look like FFIC is overpaying - P/BV at the announcement was 1.40x, which is considerably lower than the average acquisition multiple (1.68x) of peer banks (source: Mercer Capital), although EMPK is also less profitable than the average target bank (ROE=11.8%) as well.

 

Note: Recent market crisis has exploded spreads of numerous M&A situations. Although the return might seem attractive, the risk - both of transaction termination and materially increased downside - has increased substantially and there have already been several instances (e.g. TTLO) of merger cancellations.

6 COMMENTS

  1. Michael Lax

    Looks like current spread is around 20%,with ffic at 12 and empk at 9?

  2. Ilja

    FFIC Q1 results are out showing EPS drop to negative $0.05/share from +$0.25/share YoY. $1.5bn out of the $5.8bn total loans were severely impacted by COVID-19 forcing the bank to take certain short term forbearances to assist the customers.

    No updates were provided on the merger. Current upside stands at 7%.

  3. Ilja

    The spread shrunk to 3% again. Given the further uncertainty regarding the closing, the idea is closed with 12% profit in 2.5 months.

  4. Nick Ravo

    Is this still free money or am I missing something? Rumors?

Leave a Reply to Nick Ravo Cancel reply