Peak Bancorp (IDFB) – Merger Arbitrage – 28% Upside
This is an interesting $65m cross-border bank buyout with a wide 28% spread but with a very limited liquidity. Considerable patience will be required to establish a position.
Peak Bancorp, a US community bank, is being acquired by BAWAG Group, a holdco of the fourth largest bank in Austria. Consideration stands at $12.05/share in cash. Shareholder consent has already been received and the only remaining hurdle is regulatory approval from the Federal Reserve. In the recent weeks the spread has increased from the previously stable range of 10%-11% to the current 28%. There are two possible explanations for this increase. Firstly, the market is likely getting nervous about the prolonged acquisition timeline – the parties are already 17 months into the merger process, way past the initial deadline of Q1’23. Secondly – the US bank crisis and market turbulence since the merger announcement have likely heightened concerns about the buyer’s willingness to proceed with the transaction. The fact that IDFB doesn’t report with the SEC and has only limited disclosures on the bank’s website. However, the buyer, BAWAG, is actually listed on Vienna Stock Exchange (€3.6bn mcap) and has been providing very valuable commentary on the merger in their conference calls throughout the whole process. These comments and several other aspects suggest that the current spread might be overblown.
The likelihood of regulatory issues appears low, and the extended timeline shouldn’t necessarily be seen as a sign of approval problems. Despite the transaction size, cross-border mergers typically take more time to complete. Even such a small buyout as IDFB was initially expected to be closed within a year. However, the recent US banking crisis has undoubtedly thrown regulators off their game, causing significant delays and reordering of priorities. To make matters worse, the Fed office responsible for reviewing IDFB’s case is located in San Francisco, which, has been hit with sorting out two out of three recent bank failures (FRB and SVB). In Q1’23 conf. call BAWAG explained that review delays were not surprising:
That’s still pending regulatory approval. Nothing out of the ordinary is a prolonged process. Obviously, I think regulators have been probably busy. It’s out of the San Francisco office as well.
There is also no apparent reason why regulators would even be willing to block this acquisition. The target is a super small community bank in Idaho, which definitely poses no systemic risk to the US banking sector. BAWAG is a credible buyer supervised by ECB and has already been running some small cross-border lending operations in the US for the last 10 years, focused mostly on corporate and real estate sectors. Last year, US regulators have granted the Austrian group an approval to establish a representative office in the US. The language in the approval document suggests that regulators viewed BAWAG in good light at the time:
BAWAG P.S.K. appears to have the experience and capacity to support the Venice Representative Office. […] Taking into consideration BAWAG P.S.K.’s record of operations in its home country, its overall financial resources, and its standing with its home country supervisors, it has been determined that financial and managerial factors are consistent with approval of BAWAG P.S.K.’s application to establish the Venice Representative Office.
Taking all of this into account, I would be quite surprised if regulators did not approve this merger.
The risk of the buyer abandoning the transaction seems low. This is a highly strategic deal for BAWAG and will finally allow it to secure a US banking license. The buyer specified that this acquisition saves them 2-3 years of time in fully entering the US market. The buyer intends to infuse substantial capital into IDFB and completely refocus its loan portfolio from commercial real estate into retail/mortgage. With this strategy, BAWAG estimates IDFB to generate $30m profit before tax in 2025 vs $6m PBT in 2022. All of this indicates that BAWAG is mostly interested in the banking license and probably doesn’t care much about IDFB’s current operating performance or valuation multiples. Nonetheless, despite its small size IDFB operates profitably generating around 10% ROE. The offer values it at 1.4x TBV and 12x PE, which compares favorably to peer bank transaction multiples in the West over the last 12 months (see here). Any impact of the recent banking crisis on this merger should be limited too. IDFB doesn’t even have a portfolio of securities and so far has seen no leakage of deposits either. In fact, in Q1 IDFB deposits grew by 2% QoQ. In April’s call BAWAG explicitly noted that it had no concern over IDFB’s financial standing whatsoever:
And then we’ve been in touch with the management team almost daily. And that’s pretty robust and static in terms of just the deposits and divorce from some of the issues you’re seeing with the U.S. regional banks. Those issues have not migrated to Idaho First Bank or Peak Bancorp.
Overall, the merger seems likely to close and given how much time has already passed since the merger announcement, it’s probably safe to assume that the remaining timeline should be short.
However, if the merger eventually breaks, I would expect IDFB to trade down to $7/share or 25% below the current prices. This would still leave IDFB at 0.8x TBV and 7x PE, quite cheap for bank that manages to generate 10%+ ROE while being this small. Given that IDFB is clearly for sale, it is quite likely to be scooped up by other interested parties.