FNBH Bancorp (FNHM) – Merger Arbitrage – 5% Upside

Current Price: $4.02

Offer Price: $4.2

Upside: 5%

Expected Closing: Q4 2021

Offer document

FNBH Bancorp is getting acquired by another Michigan-based peer Bank of Ann Arbor. This is an all-cash transaction coming in at $4.2/share or $116.5M. Both companies were supposed to merge at the beginning of 2020 at $3.65/share in cash – the transaction had been approved by shareholders, however, got later canceled due to COVID. The new offer comes at 1.76x TBV, which is in line with the 1.8x TBV valuation of the previous one. 5% spread looks attractive given the expected closing by the end of 2021 and likely shareholder and regulatory approvals. Trading volume is limited.

The date for the shareholder vote has not been set yet, however, the approval is very likely given the support for the pre-covid merger.  The new offer does not materially differ from the old one and the offer price is at 10-year stock highs. Regulatory approval is also likely as this is a tiny merger in the industry. The downside to the pre-announcement price stands at 20-25%.

 

Some background

In Feb’20 the two banks intended to merge at $3.65/share in cash. The consideration was subject to adjustments “in certain limited circumstances”. Under the original agreement, these adjustments would have been minor (maximum consideration adjustments of $0.02/share). The offer came in at 1.8x tangible book value. On the 29th of April, shareholders voted in favor of the merger. Jun’20: Merger terminated due to COVID, with the CEO of Ann Arbor stating:

“While both companies believe in the benefits of the merger, we believe it would not be prudent at this time to continue with the merger and integration of our companies given all of the economic uncertainty,”

In Aug’21 the new merger agreement was announced at $4.2/share in cash. As with the previous offer the consideration is subject to adjustments “in certain limited circumstances”. While there has been no further information on these circumstances provided yet, I would expect these adjustments to be minor as in the previous instance.

Nevertheless, it is likely that the lack of clarity on these adjustments coupled with limited stock liquidity are mostly responsible for the 5% spread.

Ann Arbor Bank – founded in 1996, locally owned and operated. The bank has over $2.bn in total assets and over $2B AUM. Has previously acquired three other Michigan financial services companies: Bank of Birmingham in Birmingham (Jan’17), New Liberty Bank in Plymouth (May’10), UniFi Equipment Finance in Ann Arbor (Jan’13).

FNBH Bancorp – established in 1891, a full-service community-based bank with 9 offices, all located in Livingston County. As of June 30, 2021, the bank had ~$647m in assets, ~$420m in loans, and ~$577m in deposits.

 

Strategic rationale

Both parties are located in the Michigan area. Ann Arbor operates in Washtenaw, western Wayne, and Oakland counties. FNBH Bancorp is headquarterred and operates mostly in Livingston Country. As Ann Arbor is currently looking to expand into this county, this merger makes perfect strategic sense. The merged company is expected to have over 300 employees across 17 locations in Michigan and over $3B in total assets.

“We have been looking for strategic opportunities to expand Bank of Ann Arbor into Livingston County and believe we’ve found the perfect partnership with First National,” said CEO of Ann Arbor.

The CEO of FNBH Bancorp also sees strategic benefits and synergies from consolidation.

“In addition, it will greatly expand our lending limits and capabilities in our primary market of Livingston County and will allow us to use Bank of Ann Arbor’s infrastructure to meet growing compliance and regulatory burdens, giving our team members more time to focus on our clients.”

While this deal looks somewhat expensive, coming in at 1.76x tangible book value and 17.5x TTM earnings, the transaction is likely to result in material cost synergies (as is the case with most small/regional bank acquisitions)  making the post-synergy valuation look far more attractive.