Landmark Bancorp (LDKB) – Merger Arbitrage – 7% Upside

Current Price: $19.70

Offer Price: $21.03

Upside 7%

Expected Closing: Q3 2020

Press release

 

This is a rather common microcap retail banking industry merger with a larger/more efficient bank acquiring its tiny peer to capitalize on cost synergies.

Community retail bank Landmark Bancorp (market cap $131m) is subject to an acquisition by Fidelity D & D Bancorp (market cap $325m). The transaction was announced on the 26th of February. Consideration stands at 0.272 shares of FDBC + $3.26/share in cash per each LDKB share. The ratio is 82% stock, 18% cash. for hedging, there are 4.6k shortable shares available on IB at a 2% annual fee rate. LDKB liquidity is quite limited.

The merger is subject to Landmark's shareholder approvals. Information on LDKB shareholders is limited. However, with the offer price materially above the previous all-time high and 1.4x TBV multiple (also above the historical LDBK levels and rather inline with industry acquisition multiples), the consent should be received without a hitch.

FDBC has done similar acquisitions before. In May'20 it closed the merger with MNB Corp. The transaction was announced pre-COVID (Dec'19), at 2x TBV and 20x P/E, and was closed at the agreed terms during the peak of the pandemic. Therefore, the chance of FDBC walking away from the current deal now seems to be very low.

Downside to pre-announcement is 30%.

The main reasons for the spread seem to be low liquidity and limited borrow availability.

 

Strategic rationale

FDBC owns 20 branches in Lackawanna and Luzerne Counties and the Lehigh Valley in Northeast/East Pennsylvania. LDKB owns 5 branches in Lackawanna and Luzerne. So there is a meaningful geographical overlap, which will substantially increase FDBC market share in the region. especially in Luzerne county.

Branches (from the merger presentation):

Market share in Luzerne:

Market share in Lackawanna:

Loan portfolios are similar, with LKDB having more exposure to commercial real estate. FDBC states that it sees an opportunity to expand the target's commercial and retail lending segments:

Overall, FDBC expects significant cost savings from the transaction and guides 4.9% EPS accretion in 2021 and 13.6% in 2022.

 

Valuation

The offer comes at a premium to an all-time high price of LDKB, 1.38x TBV and at 36.9x 2020 earnings. TBV multiple is materially higher than the historical figures, even in pre-COVID times. Due to low profitability, the PE multiple appears to be very high. However, due to the tiny size Landmark is a much less efficient bank operator, and assuming that FDBC manages to increase LDKB efficiency to its own levels, the PE ratio post expected cost synergies is substantially lower at 12x. FDBC itself trades at 24x PE multiple.

Landmark's historical performance and offer valuation:

FDBC historical valuation:

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