Home Bancorp Wisconsin (HWIS) – Merger Arbitrage – 13% Upside

Current Price: $24.25

Offer Price: $26.47-$27.32

Upside: 9%-13%

Expected Closing: Q2 2022

Press Release

 

This is a microcap (~$35m) bank acquisition by a credit union with a relatively extended timeline and potential consideration adjustments, both of which are likely responsible for the current 9%-13% spread. Similar cases covered on SSI include EGDW, WEIN, BFFI. All of these had similar uncertainties yet all have closed successfully. So it is not unreasonable to expect a similar outcome in this case as well.

On the 30th of September, a 2-branch Home Savings Bank entered into a definitive agreement to be acquired by Dupaco, a private credit union with 18 locations. Following the transfer of assets/liabilities in exchange for cash, Home Savings Bank and Home Bancorp will settle their remaining obligations and distribute the left-over cash to shareholders. Distributions are expected at $26.47-$27.32/share. The distributions should come within 180 days after the suggested merger completion in Q2 2022 but may take longer. The deal is subject to regulatory and shareholder approvals, both of which are likely to pass as this is a small Bancorp transaction (unlikely to receive regulatory setbacks) and comes at a considerable premium to historical valuations at 1.86-1.92xBV. Management holds ~8% of shares and supports the merger. Both of HWIS’ branches are located in Wisconsin, where Dupaco also has two operating locations. HWIS trading volume is limited, but has somewhat increased after the merger announcement. Downside to the pre-announcement price stands at just over 30%.

Merger consideration and expected shareholder distributions are subject to adjustments, which include but are not limited to:

• Consideration changes based on the amount of corporate level taxation of the transaction;
• Uncertainties with respect to the regulatory treatment of and costs associated with the liquidation account;
• Target’s future operating results and whether it can meet a minimum equity value at closing of the Transaction;
• The amount of cash held by target at closing;
• Costs related to the dissolution of Home Savings Bank and Home Bancorp.

Though it is hard to assess the probability of these adjustments occurring and having a material effect on the consideration, the bank itself seems to be quite stable and has managed through COVID quite well (although FY 2020 earnings are bloated due to the full elimination of the $1.9 million allowance against the company’s deferred tax asset). Profitability issues are mostly related to a lack of scale. Information on the loan portfolio is scarce and a bit dated, but it seems that portfolio mostly (80%) consists of residential real-estate mortgages. ~3% is in commercial and industrial loans. The proxy statement should becomeavailable shortly on the Home Savings Bank’s website and might include more recent updates on the balance sheet and loan portfolio. Although HWIS no longer reports to the SEC, the stock is designated as Pink Current and can be purchased through IB.

Dupaco is a credit union, headquartered in Dubuque, Iowa. Operates 18 branches throughout Iowa, northwest Illinois, and southwest Wisconsin. The merged company will have 20 branches after this transaction and will hold assets of approx. $2.8b as of 30 June 2021 ($~2.6b in assets prior to the merger).

Home Savings Bank operates two bank branches in Madison, Wisconsin with ~$183m in assets as of 30 June 2021. Was demutualized in 2014.