That is an event-driven alternative. Neither Choose Bancorp (NASDAQ:SLCT) nor Premara Monetary (OTCQB:OTCQB:PARA) might be analyzed as a standalone funding. I’ll relatively concentrate on the particular alternative ensuing from the deliberate merger. Hat tip to Thinley Wangchuk for the concept (value subscribing).

The merger consideration

On July 21, 2017 Choose Bancorp and Premara Monetary announced the signing of a definitive merger agreement. In case the merger goes by, PARA shareholders can elect to obtain

  • 1.0463 shares of SLCT per share of PARA, or
  • $12.65 in money per share of PARA.

The money consideration is fastened at roughly 30% and the share consideration fastened at roughly 70% of the entire consideration. An oversubscription of both choice will result in proration.

Timeline

Per the merger announcement the deal is predicted to shut within the fourth quarter of 2017. SLCT’s most up-to-date quarterly submitting (10Q) didn’t comprise an anticipated time limit. PARA didn’t launch a submitting since announcement. PARA’s banking subsidiary (CAROLINA PREMIER BANK) solely launched a standardized FDIC call report in August. Probably the most conservative assumption for an anticipated shut in This autumn could be December 31, 2017.

However, it’s going to take a while to make the election and get the merger consideration. Per their settlement SLCT shall ahead the election of consideration to all shareholders of PARA at or as quickly as moderately sensible following the time limit, however not lower than twenty enterprise days following the time limit. Then shareholders have till the election deadline, which might be twenty-five enterprise days following the mailing date of the election of consideration. Then SLCT’s trade agent has 5 enterprise days to calculate the allocation amongst holders of PARA of rights to obtain SLCT widespread inventory or money because of the merger. All in all this might add one other 20+25+5=50 enterprise days. My conservative expectation for the date to obtain the merger consideration is due to this fact February 28, 2018.

Deal danger

To be able to full the merger they want approvals of or non-objections from

  • the Board of Governors of the Federal Reserve System,
  • the Federal Deposit Insurance coverage Company (FDIC) and from
  • the North Carolina Commissioner of Banks.

A discover of their software for authority to merge was posted to the North Carolina Commissioner of Banks’ website on September 15, 2017.

Along with a number of regulatory approvals requisite shareholder approvals are required. Dates for the conferences to vote on the merger might be set sooner or later if every part goes in keeping with plan on the regulatory aspect. SLCT will file a so known as S-Four that can comprise a joint proxy assertion/prospectus of Choose and Premara.

SLCT shareholders will just like the strategic and geographical match of the deal.

Rapid EPS accretion (excluding merger prices) in reference to an IRR above 20% makes the deal financially sound for SLCT’s shareholders. This IRR compares favorably to the 5yr common return on fairness of 6.1% and present 6.5%. Stand-alone EPS is predicted to extend by 10.1% starting in 2018.

Alternatively PARA shareholders get a take care of an implied valuation of 1.66x tangible ebook and 47x earnings. Taking out an anticipated 40% of Premara’s non-interest bills is simply not possible by itself with the present low scale. The deal resulted from PARA’s objective of maximizing shareholder worth as their CEO told the Charlotte Observer. With 70% of the consideration in shares former PARA shareholders may nonetheless revenue from the price financial savings in the event that they want to maintain on to the SLCT shares they’d obtain within the merger. The deal is smart for each shareholders teams. Mergers of small banks simply present too highly effective value financial savings to be ignored.

The transaction has been unanimously authorized by the Boards of Administrators of every firm. SLCT has a low Institutional ownership of 17%. Per the latest proxy the one >5% shareholder was Jeffrey S. Stallings with eight.5%. All administrators and government Officers as a gaggle owned 14.2% of the financial institution and are prone to vote for the merger.

Per the latest assertion the next administrators, officers or management individuals owned PARA shares:

ownershipTwo administrators of PARA or its subsidiary might be nominated to the board of SLCT. Additionally per the merger settlement each boards will advocate their shareholders to vote for the deal. It is at all times a wildcard how shareholders will vote, however it make sense for the merger to be authorized. Exhibit B of the merger settlement accommodates a “SHAREHOLDER SUPPORT AGREEMENT” however no info is given if and for what number of shares shareholders entered into such agreements. To get extra info in reliable written kind, we now have to attend for the S-Four submitting. My guess is the identified holders above with collectively over 35% are prone to vote for the merger.

SLCT has a market capitalization of about $136MM. The transaction worth of about $40MM with about $12MM payable in money will not be trivial for such a small financial institution. SLCT then again is effectively capitalized. The fairness to property ratio was 11.9% at June 30, 2017. As you’ll be able to see capital ratios had been effectively above the necessities per the latest report. SLCT can afford to pay $12MM. Anyway $12MM seems to be low in comparison with the pre-approved however unused strains of credit score for purchasers totaling $135.eight million. You’ll be able to learn extra on their liquidity on web page 55 of the latest 10Q.

PARA additionally has a powerful steadiness sheet. With fairness to whole property of per the latest report of 9.6%. On the finish of 2016 PARA even had unsecured lines of credit of roughly $10.8MM with no borrowings on the road. PARA’s solely monetary debt are FHLB advances of $25MM in comparison with fairness of $25MM and $260MM whole property. This implies PARA may theoretically pay the money portion of the take care of their line of credit score and a few extra FHLB advances.

Financing ought to be no drawback and the FDIC must also be completely happy to have a extra wholesome mixed entity after value chopping. All in all I imagine the deal danger is low.

As you’ll be able to see, on deal announcement PARA jumped from $9 to $12. Since then it has slowly traded right down to $11.42 on low quantity. If the deal breaks PARA may commerce again to the undisturbed worth of $9. This equals 21% draw back.

Upside of the deal at present costs

With PARA and SLCT being no dividend payers, the worth of the blended merger consideration can simply be calculated as follows. For the annualized return, we will use the anticipated date of receiving the merger consideration from above.

deal upside

An annualized return of 17% is enticing sufficient for me given the low deal danger. There may be additionally some upside if pro-ration is low and one elects to obtain the extra beneficial money consideration (see under). After all, the values are topic to vary.

The later one receives the merger consideration the decrease the annualized return might be. A fee on the finish of April would nonetheless present an annualized return above 12%.

The deal unfold to the blended consideration was $zero.81 on the time of writing and $zero.78 once I calculated the next chart. The unfold is vary certain.

To hedge towards a falling share worth of SLCT one may brief 70%*1.0463 shares of SLCT per share of PARA, for instance at a charge charge round 1% at Interactive Brokers. As SLCT will not be overly costly at 1.3x ebook, it might not be crucial to totally hedge relying on particular person danger tolerance.

Conclusion

On the present worth of $11.42 PARA provides a sexy annualized return in case the deal closes within the anticipated timeframe. The chance of not closing is low in my view. However draw back to the undisturbed worth could be excessive with 21%.The SPDR S&P Regional Banking ETF’s (NYSEARCA:KRE) adjusted closing worth since deal announcement on July 21 is mainly flat ($54.04 as much as $54.06). This implies no additional adjustment to the draw back is important if one assumes PARA would have traded according to this ETF if no deal had been introduced.

Causes for the chance are:

  • market capitalization under $140MM for SLCT and under $40MM for PARA,
  • OTC itemizing and non SEC reporting of PARA,
  • low liquidity with common day by day volumes for the final three months of 18K for PARA ($211Ok) and 12Ok for SLCT ($136Ok) and
  • zero liquidity from the efficient time of the merger till one will get the merger consideration.

I believe an anticipated annualized return round 17% and absolute upside round 7% justifies taking the in my view low likelihood draw back danger of round 21%. With the markets making new highs not attributable to vastly improved earnings however greater valuation the draw back danger of the broader market, if margins and earnings multiples would ‘normalize’, will increase. This makes capturing an uncorrelated merger unfold all of the extra alluring to me.

Disclosure: I/we now have no positions in any shares talked about, however might provoke a protracted place in PARA over the following 72 hours.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Editor’s Observe: This text covers a number of shares buying and selling at lower than $1 per share and/or with lower than a $100 million market cap. Please pay attention to the dangers related to these shares.