Royal Financial (RYFL) – Merger Arbitrage With Odd Lot – 7% Upside

Current Price: $18.62

Offer Price: $19.84

Upside: 7%

Expected Closing Date: Q1 2022

Press release


This is a nano-cap bank merger with an unusual odd lot provision. Finward Bancorp is acquiring Royal Financial. RYFL shareholders, who own 101 shares or more will be able to choose from $20.14/share in cash or 0.4609 FNWD shares, subject to a total maximum cash proration of 35%. Owners of less than 101 shares will receive only cash. Assuming maximum cash proration, the upside stands at 6.5% and for odd-lots – at 8% or $152. 15k shortable shares are available on IB at 2.8% ann. fee. Daily trading volume is $100k+. Shareholder approval from both companies will be required. The merger is expected to close in Q1 2022.

Strategic rationale is pretty straightforward – branches of both banks are quite close to each other and FNWD is looking to expand and strengthen its market presence in Chicagoland. The buyer also plans to close at least one RYFL location and expects the merger to be 21% accretive to 2022 earnings and 25% accretive to 2023 earnings. TBV earn back is estimated at 2.3 years. The loan portfolio’s of both banks are quite similar with the focus on residential and commercial real estate. The offer comes at 1.1x TBV and 9.8x FY21 P/E, in line with FNWD’s current valuation, despite the buyer being slightly more profitable historically. FNWD directors own 13.7% of shares and RYFL insiders own 23%.

The downside to pre-announcement seems limited, however, we will likely see at least 1 more financial report until closing.


Finward Bancorp

The buyer operates Peoples Bank with branches Lake and Porter Counties, Northwest Indiana, and South Chicagoland. 22 locations. $1.6bn total assets.

rylf fnwd locations

Historical FNWD performance:

ryfl fnwd fin

In 2018/2019 FNWD (previously known as NWIN) acquired AJS Bancorp with a similar consideration structure (included odd lot provision). The offer was priced at 1.09x TBV. The idea was covered on SSI and closed successfully.


Royal Financial

Royal Financial operates 11 branches in Chicago with $533m in total assets.

ryfl chicago

Historical RYFL performance:

rufl fin




5 thoughts on “Royal Financial (RYFL) – Merger Arbitrage With Odd Lot – 7% Upside”

  1. Why does there need to be an odd lot provision for a company that is about to be acquired? It is kinda strange to me indeed.

    • While it does seem strange on the face of it, it is likely due to small minority shareholders being a hassle for the company, i.e it wants to get rid of them. A similar situation is when a tender offer is launched with an odd-lot provision.

    • The acquirer probably doesn’t want to add a bunch of (very) small shareholders to its ownership base.

  2. Spread has narrowed to about 2% for non-odd lots, so we are closing the idea with a 4.5% gain in 1.5 months. The merger seems likely to close, so it might be still worth to keep a tiny odd-lot position – 4.8% or $93 upside left.

  3. Just highlighting that due to the recent run-up in FNWD shares, RYFL now trades above the cash consideration, however, there is still 4.8% upside to the mixed cash+stock consideration for shareholders that own more than 101 shares. 37k shortable shares are available to borrow at 2.5% ann. fee, which should make a minor impact on the current spread. Unfortunately, as RYFL share price trades above the cash consideration, the situation is not actionable for odd-lot shareholders (<101 shares). Liquidity is very limited.

    Currently, shareholder approvals from both banks and regulatory approvals are still pending. FNWD and RYFL shareholder meeting dates are scheduled for the 13th of December (tomorrow). FNWD directors own 13.7% of shares and RYFL insiders own 23%. We expect the approvals to pass and it's likely that the spread is going to narrow quickly after that. All consents are expected to be received before the end of this year and the deal is expected to close in Q1 2022, most likely in January.

    Last month RYFL announced strong quarterly earnings (Q1 FY21) showing EPS growth of 87% and annualized ROE at 12%. The most recent TBV stands at $18.26/share. Also, last month FNWD uplisted to NASDAQ, which had a very positive impact on its share price - shares are up 17% since the 29th of October. RYFL shareholders will likely be happy to roll over to NASDAQ as well.

    The share + cash (non odd-lot) consideration values RYFL at 1.2x TBV - a premium to the valuation over the recent years (except 2018), which is also an all-time high price. FNWD trades at 1.25x TBV.

    There is also a dissenting shareholders condition involved - "The total number of Royal Financial’s dissenting shares shall be no greater than 7.5% of the number of shares of Royal Financial common stock outstanding as of the date of the Merger Agreement." However, apparently, the condition can be waived by FNWD. Overall the shareholder approval/merger break risk is low.


Leave a Comment