Lincoln Bancorp - Tough deal to price, but in the money today
Target: LNCB - Lincoln Bancorp ($12.50)
Acquirer: FRME - Commerce National Bank ($21)
THE DEAL: Merger letter to shareholders on this one says:
In exchange for your Lincoln common shares, you will have the opportunity to choose either 0.7004 shares of First Merchants common stock or $15.76 in cash for each Lincoln common share you own. However, no more than 3,576,417 shares of First Merchants’ common stock and no more than $16,800,000 in cash may be paid to all Lincoln shareholders in the merger, and there may be re-allocations of cash and stock to certain Lincoln shareholders if either threshold is exceeded
Facts:
- 5,319,731 shares outstanding of LNCB stock
Scenario 1
Currently, FRME stock is $21/sh, or $14.70 per share of LNCB you own.
At today’s FRME price, you’d take the cash deal. BUT– the deal has a cash payout max of $16,800,000. That’s just 1,065,989 shares. LNCB has 5,319,731 outstanding, so the remaining 4,253,741 shares would be required to get 0.7004 per share at the current FRME price of $21… or $14.70/sh.
I assume that all common shares are equal and that they would equally assign the lower priced shares to everyone (a big assumption, since they have not released these types of details of yet). If true, at today’s price, 79.9% (4,253,741/5,319,731) of your shares would get $14.70/sh, and 20.1% (1,065,989/5,319,731) of your shares would get $15.76/sh.
N = number of shares I own
My payout = ((N*0.799)*14.70) + ((N*0.201)*15.76)
OR
N*14.91
If I own 100 shares, that would be $1,491.
If I bought 100 shares today at $12.50, they would cost me $1,250 (less commission). That would net me $241, or an ROI of 19.3%.
Scenario 2
Let’s assume FRME stock goes to $23.50/sh at deal time (everyone will want shares of FRME instead of cash). With 5,319,731 shares of LNCB outstanding, 1,743,314 shares will have to take the cash deal of $15.76/sh (remember, the deal has a max share payout of 3,576,417 shares of FRME stock). That’s $27,474,628, or $10,674,627 more than the $16,800,000 deal cash cap will allow. In other words, in this scenario, the deal only allows for 1,065,989 shares of LNCB to be exchanged for cash. This means the deal has to be adjusted downward somehow to allow for all remaining LNCB shares to bought out…I am not sure how that works… maybe the deal price is dropped to say $9.63 per share? I assume a future SEC filing/proxy statement will detail how this will work.
In that case, 67.2% of the shares get FRME stock, and 32.8% *must* take cash.
N = number of shares I own
My payout = ((N*0.672)*23.5) + ((N*0.328)*9.63)
OR
N*18.95
If I own 100 shares, that would be $1,895.
If I bought my shares today at $12.50, it would cost me $1,250 (less commission). That would net me $645, or an ROI of 51.6%.
Comments & Conclusion
This deal is a friendly merger. They have scheduled it to execute by the end of 2008. I think this deal will be done by 12/31/2008.
The deal hinges on the price of FRME stock. The higher FRME goes before the deal is struck, the better. Based on all of my assumptions, the lowest that FRME stock can go before I start losing money on this deal is $16.70.
If I want a decent ROI (above 10%) and I buy LNCB at $12.50, then price of FRME needs to be above $19/sh. Right now, FRME is $21/sh, so I my current M&A Status = BUY. If LNCB goes lower, so much the better.
Sources:
March 4th, 2009 at 10:31 am
What do you think of this deal now that most bank stocks, including FRME, are in the toilet?
March 4th, 2009 at 1:42 pm
@Art V– Well, since the deal already closed and I made money on it (see the My Completed Deals tab at the top of page), I would say it was a good one. As for FRME stock in general, I have no comment, as I was only it for the M&A arbitrage! Thanks for the comment, cheers.