Marlin Business Services (MRLN) – Merger Arbitrage – 6% Upside

Current Price: $22.11

Offer Price: $23.5

Upside: 6%

Expected Close: Q1 2022

Press Release

 

This is a micro-cap bank acquisition with the spread existing mainly due to a few months left till closing (Q1'22). Marlin Business Services is subject to an acquisition by HPS Investment Partners (PE firm with $68bn AUM) at $23.5/share in cash or $283m in total. Shareholder approval has already been received. The remaining conditions include regulatory consents and Marlin Business Bank ceasing operations as a bank. Neither of these should be a hurdle to close this transaction. The consideration is subject to potential downward adjustments if the costs of the de-banking exceed $8m - however, these will still not make any material impact on the consideration, as confirmed by MRLN. Buyer's intentions have proved to be serious and the offer price looks favorable for HPS making transaction termination unlikely. The downside to pre-offer price stands at 35%, however, aside from HPS the company had multiple buyers lined up both pre and post-COVID with offers around and above the current price. Even if the current transaction fails, there's a good chance that MRLN could become a target quickly again.

The de-banking clause requires MRLN has to cease all operations as a bank before the merger closes. Marlin has already filed the plan with regulators and received consent on the 25th of June. The expenses of the procedure should fit within the set limit of $8m (from the proxy):

The Company board, in consultation with Company management, believes that the covered costs associated with the De-Banking are unlikely to exceed $8.0 million by a material amount, if at all, so that any De-Banking adjustment to the $23.50 per share merger consideration would likely not be material.

Even if the eventual costs appear to be 40% higher than expected, the consideration would still stand at $23.23/share (5% upside).

The current offer comes at ~1.3x book value versus a historical valuation of 0.7x-1.6x over the last 5 years and is virtually in line with pre-COVID (2019) levels despite the banking sector (XLF ETF) trading over 20% above pre-COVID heights. MRLN was generating stable 13%+ ROE pre-COVID, while the recent Q2 shows ROE at 17%+.

The sale process was started in Jan'20 and in February the bank had 5 interested parties, including HPS, submitting bids in the price range of $23-$28.5/share. Then the COVID-hit and the sale was postponed. MLRN shares dropped to as low as $4.66/share in March'20. Half a year later, HPS returned with a $15/share bid, which was raised to $16.75/share in December. However, MRLN then decided to postpone the sale as it wanted to release its earnings (i.e further recover from COVID) before making a decision. The sale process was renewed in January of this year and one month later consideration was bumped to $22.5/share in cash before receiving one more bump to the current consideration of $23.5/share. Aside from HPS, another buyer Party G was offering $22/share (70% cash, 30% stock) in April'21 and then upped the bid to $25/share. However, MRLN chose HPS instead due to certain regulatory (Party G apparently being a fintech) and financing concerns.

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