Current Price: $14.60
Offer Price: $15.55 (updated to $20)
Upside: 7% (updated to 10%)
Expected Closing: Q4 2021
SNNY Investment case has been updated – please check the comment on the 13th of August.
This is a nano-cap ex-mutual bank acquisition by a private non-bank lender.
On the 16th of March, DLP Real Estate Capital announced the acquisition of a retail community bank Sunnyside Bancorp. Consideration stands at $15.55/share in cash. The total value of the transaction is $12m. SNNY shareholder approval will be required. Directors own 6.1% and will support the merger. Closing is expected in Q4’21. Trading volume is low, however, it should be possible to build a sizeable position over time.
SNNY operates only 1 branch in Irvington, New York. Due to the absence of scale, the bank operates unprofitably and has historically been trading at around 0.8-0.9x BV. The offer comes at a 1.04x BV multiple, which should be enough to satisfy the shareholders. Most of SNNY management has been with the bank since 2010 (pre-conversion from mutual). Their decision to sell should also support a positive voting outcome.
The buyer and strategic rationale
DLP Real Estate started out as a standard real estate firm and over time expanded into the financial services sector with real estate lending, distressed real estate investing, and asset management divisions. The group focuses mostly on multifamily real estate. Apparently, the group intends to continue expanding its financial services arm and plans to inject capital into SNNY, strengthen its digital banking capabilities, and start expansion across the US. PR:
We intend to offer private banking services to high net-worth investors and small business owners around the country but with an emphasis in the North- and Southeast. The bank is uniquely positioned to leverage DLP’s real estate and investment expertise to provide a competitive and rewarding customer experience.
Overall, SNNY seems like a suitable candidate for DLP given its primary focus on multifamily real estate loans (more details below) and location in Westchester County, the second-wealthiest county in NY.
DLP is also interested in SNNY deposits ($97m assets) as it provides a cheaper source of funding compared to private placements. This seems to be the main rationale behind the recent increase of small bank takeovers by non-bank lenders (SoFi, in addition to the ones mentioned above). The whole rationale behind this trend is well-detailed in this article. DLP banking consultant Fred Reinhardt, who will take over the SNNY CEO role, commented:
The true secret’s that financial institution deposits are cheaper funds. That’s an enormous factor, particularly once you’re in a really aggressive market like residential lending.
DLP seems like a credible buyer with $1.2bn AUM, 12k properties in the portfolio, and 700 loans under management. The risk of merger termination seems to be low.
SNNY
As of Q3 Sunnyside Bancorp had $97m in assets and $11.8m in shareholders’ equity.
Loan book:
- 44.6% – loans comprised of owner-occupied, on-to-four family residential real estate loans;
- 37.2% – commercial real estate and multi-family (not owner-occupied) mortgage loans;
- 14.7% – student loans;
- 3.5% – commercial, home equity, and passbook loans.
A competing bid for SNNY at $18.5/share from the shareholder with 10% ownership.
“Because we remain committed to a transaction and our interest in Sunnyside remains high, Rhodium is prepared to proceed immediately with a fully financed, cash offer for 100% of the outstanding shares of Sunnyside at $18.50 per share. This represents a 23% premium to Sunnyside’s closing price as of Monday, April 19, 2021 of $15.00, a 19% premium to the merger price and a 50% premium to Sunnyside’s unaffected share price on March 16, 2021. Unlike our previous attempts to engage this Board privately, we have decided to make this offer public so that Sunnyside shareholders will be able to independently evaluate our offer.
<...>
Accordingly, if we have not received your response by 5:00 p.m. EDT on Wednesday, April 28, 2021 indicating that Sunnyside will enter into a confidentiality agreement and proceed with constructive discussion and meaningful evaluation of our offer, we will take our compelling offer directly to your shareholders.”
https://www.sec.gov/Archives/edgar/data/1571398/000137647421000122/opc_ex99z1.htm
6% spread remains to Rhodium’s $18.50/share cash offer. Overall, the situation seems quite interesting. A potentially upcoming hostile tender offer should allow shareholders to profit even if the management rejects Rhodium’s offer. In case Rhodium backs down (or is eventually unable to go hostile) downside should be protected at 11% (DLPs offer), however, this scenario seems unlikely. Bidding war with DLP or a slight bump to persuade the management/shareholders is not to be ruled out here as well.
The buyer is credible – Rhodium is a New York’s real estate investor focusing on multi-family and office sectors. It also runs a crowdfunding RE investment platform Rhodium Invest. Since 2012 it made over 100 acquisitions worth over $1bn together with various partners (private investors and institutions). Overall, I expect that there should be no issue here regarding financing (the transaction would cost around $12.6m).
Rhodium has accumulated its stake in SNNY since the beginning of April at an average of $15.17/share (although a minor part of the stake was acquired at $17-$18+/share).
https://www.sec.gov/Archives/edgar/data/1571398/000137647421000122/opc_ex99z3.htm
The buyer claims that it has already made several proposals to SNNY before – in July’20, November’20 (at 1.15x BV), and then on the 25th of March, after SNNY’s agreement with DLP. In all instances, the buyer got rejected without explanation. This seems quite strange, however, if the board doesn’t respond to the current $18.50/share offer by the 28th of April, Rhodium intends to go hostile and claims that there are no regulatory hurdles to stop them:
The price comes at 9.4% premium to an all-time high and 19% premium to DLP’s offer. It values the company at 1.2x BV ($15.37 as of Dec’20) vs 1.01x by DLP. The average M&A multiple of western peers seems to be 1.5x TBV (although keep in mind that SNNY is a tiny unprofitable bank). In this light, Rhodium’s offer seems much fairer than DLP’s and should be preferred by SNNY shareholders. More info on peer M&A multiples can be found in Mercer Capital’s Bank Watch – https://mercercapital.com/content/uploads/Mercer-Capital_Bank-Watch_2021-03.pdf
Rhodium did not provide many details on the strategic reasoning:
However, the rationale should turn around SNNY’s complementary geographical location and focus on multifamily loans.
SNNY management owns 6.1% of shares. Other major shareholders:
– M3 Funds owns 9.89%. 5.3% were acquired in Sep’16 at around $12.50/share. The remaining in Feb’17 around $13/share.
– Rhodium owns 9.8%
– Maltese Capital owns 8.2%. 6% were acquired in Feb’15 around $10/share and the remaining in Feb’17 around $13/share.
Still no news from either of the buyers. SNNY recently released Q1 results – BV dropped to $13.82/share, EPS fell to -$0.51/share (mainly due to an increase in merger-related professional fees). Liquidity is low and there were no trades in SNNY stock over the last 2 days. However, at the price of the last trade, the spread to Rhodium’s offer has increased to 13%, while the downside to DLP’s offer is now only 5%.
SNNY has entered into a definitive agreement with Rhodium, which raised the offer by 25 cents to $18.75. Rhodium expects to close the transaction during 2021Q4 or 2022Q1.
IRVINGTON, N.Y., June 16, 2021 /PRNewswire/ — Sunnyside Bancorp, Inc. (OTCBB: SNNY) (“Sunnyside” or the “Company”) today announced that it has entered into an agreement with Rhodium BA Holdings LLC (“Rhodium”), a New York-based private equity group, to acquire the Company and its subsidiary, Sunnyside Federal Savings and Loan Association of Irvington (“Sunnyside Federal”).
The Company and DLP Bancshares have mutually agreed to terminate their previously announced merger agreement, dated March 16, 2021, (the “Initial Merger Agreement”) and Rhodium has paid a termination fee to DLP Bancshares with respect thereto.
Under the terms of the merger agreement with Rhodium, dated June 16, 2021 (the “Rhodium Merger Agreement”), shareholders of Sunnyside will receive $18.75 per share in cash. The proposed transaction, which has been approved unanimously by Sunnyside’s board of directors, is subject to the approval of the Company’s shareholders, regulatory approval and other customary closing conditions. Rhodium expects to close the transaction during the fourth quarter of 2021 or in the first quarter of 2022.
https://www.prnewswire.com/news-releases/sunnyside-bancorp-announces-rhodium-ba-holdings-to-acquire-company-for-18-75-per-share-301314183.html
Sunnyside Bancorp takeover situation has worked out much better than initially expected. The remaining spread to the Rhodium’s offer now stands at 3%, while closing is estimated in Q4’21-Q1’22. Therefore, we are removing this idea from the active cases with 23% profit in 3 months.
Competing offer at $20.
https://www.accesswire.com/658641/Offer-to-Purchase-Sunnyside-Bancorp-Inc-by-Local-Investor
Given the public letter from the new interested party, we are bringing SSNY back among active ideas at $18.15. At this price, there is a 3.5% spread to Rodhiums all-cash acquisition offer (with a signed definitive agreement) and a 10% spread to offer by Mr Torsoe (not acknowledged by the company yet).
Given two interested parties – actually, three if we count the terminated merger with DLP Real Estate Capital at $15.55 – and the required approval by the majority of shareholders, this merger arbitrage seems to be quite safe from the downside perspective and provides a clear path to potential 10%+ upside either from Mr. Torsoe’s offer or an improved bid from Rhodium.
I am puzzled why the board has not made Mr. Torsoe’s offer public or engaged in negotiations. Management acknowledged Rhodium’s offer only after public pressure and threats. No idea why the company chose to sign the merger agreement with Rhodium when, apparently, at the same time a higher offer from Mr. Torsoe was on the table. Also, based on the info disclosed in Mr. Torsoe’s letter neither the financing nor regulatory approvals could have been the reasons.
The main risk here seems to be the continued poor of SSNY performance and bidders deciding to walk away if this persists – over the last two quarters the bank reported losses equal to c 8% of BV of equity, and these losses are not from bad loans but simply from too high expenses. However, Mr Torsoe seems to acknowledge this and states that the only party likely to walk away is Rhodium.
Aside from the info on Mr Torsoe presented in the press release, not much more can be found. I believe that he is 85 years old. He is present on 5 different boards. Also, the Chairman & President of Torsoe Brothers Construction Corp. and Managing Partner at Normandy Village Apartments. From the press release:
Kenneth Torsoe sec filings below. He owns 1.335m sh of CNOB, at $29/sh, worth $39m. Vs SNNY only $15m at $20/sh.
https://www.sec.gov/edgar/browse/?CIK=1049348
https://www.sec.gov/Archives/edgar/data/712771/000101905621000220/torsoe_13ga1.htm
Torsoe raised his bid to $22/share (Friday after hours) and demands that SNNY “stop ignoring his offers and negotiate a deal with him”. If the company considers his offer superior, Rhodium will have 5 days to counter. Torsoe’s offer will be withdrawn if not accepted by the 10th of September. 4% spread remains for Rhodium’s current offer and 13% for the new Torsoe’s offer.
https://www.bamsec.com/filing/101905621000493/2
As promised, Torsoe is launching a hostile takeover with price increased to $23/share. I think many shareholders will tender. Management owns 6.4%. Have no idea why aren’t they engaging with him. At the last close price, there’s 1.5% downside to Rhodium’s bid and 12% upside to Torsoe’s. But liquidity is dry…
There are some regulatory nuances involved, but it seems to be a minor issue. Does anybody have any insight?
https://www.bamsec.com/filing/101905621000498/2
Management is still ignoring Torsoe and now intends to proceed with Rhodium’s offer – the shareholder’s meeting is set for the 10th of November. No news about the hostile bid yet.
https://www.bamsec.com/filing/149315221024925?cik=1571398
Rhodium offer of $20.25 was approved at special meeting on 10 November. Closing was expected Q4 or 2022Q1.
https://sec.report/Document/0001493152-21-027885/
Removing SNNY from active ideas with 10% return in 3 months from the $18.15/shares levels when the case was re-activated due to continued bidding by the interested parties.
In the recent meeting SNNY shareholders have approved Rhodium’s $20.25/share offer. The promised tender by Mr. Torsoe at $23/share was never launched – only intentions announced to do so in the TO-C filling. So it is not clear the offer was real or only meant to press Rhodium to offer a higher price.
These SNNY developments are, while not really unexpected, at least interesting and somewhat irritating. (1) Torsoe seemed active up to his increased offer of $23, and then totally silent afterwards, no word of what happened to his filed intentions. (2) Management totally silent about a 14% higher offer (23 vs 20.25): simply ignored shareholder interest to pursue a preferred offer, or if management has some valid reasons at least shareholders as owners of the bank, should deserve to know why. (3) The lower offer was overwhelmingly approved by shareholders, nevertheless!