Game has changed for CIBC
It may all become clearer Wednesday.
But in the meantime, the combination of the year’s two major shocks — the vote by Britain to leave the European Union and the election of Donald Trump as the incoming U. S. president — loom as potential deal-killers for CIBC’s plan to acquire Chicago-based PrivateBancorp Inc.
Those plans are set to materialize Thursday when shareholders of PrivateBancorp gather to give either the thumbs up or thumbs down to the US$ 4.9- billion transaction. The overwhelming feeling — a view supported by market prices — is that unless the terms of the transaction are changed the deal is dead.
“We estimate that CIBC may need raise its bid to the mid-$50s to get PVTB shareholder approval,” said Lana Chan, a New York based ana- lyst with BMO Capital Markets, in a note released Tuesday. Chan added PVTB may “delay” the shareholder vote.
When the deal was announced on June 29 — or six days after the Brexit vote — the implied value of each PVTB share was US$47. (At that time, the offer represented a reasonable premium of about 24 per cent above PVTB’s 10day volume weighted average trading price. The shares were on the slide, as were all financials, because of the surprise victory of the leave side.) As a result of that vote, expectations of a hike in U.S. interest rates were reduced. “In light of the lower rate outlook, PVTB accepted a proposed sale price of US$47 per share,” said Chan.
Those shares closed Tuesday at US$ 52.14 suggesting there’s little likelihood a PVTB shareholder will accept CIBC’s part- cash, part- stock offer.
And that’s where the surprise from Trump winning the U. S. presidency comes in. Since the election, stock markets have risen dramatically with all three major U. S. indexes hitting all-time highs. And U.S. regional banks have also rallied, up by at least 20 per cent.
Caught in the middle is CIBC and its planned acquisi- tion of PrivateBancorp, a deal the bank is very interested in closing, When the deal was announced, CIBC had this to say: “The combination of CIBC and PrivateBancorp creates a strong, integrated and client-focused U.S. banking business that is expected to contribute 10 per cent plus of CIBC’s consolidated net income in the short term and 25 per cent plus over time.”
If the bank can turn those plans into reality, then the acquisition will be a game changer. And presumably, given the amount of work taken to get a negotiated transaction, it’s a deal that it may not want to walk away from. Ergo: offer a higher price.
Of course that higher bid has to be set against the US$ 150- million break fee that would kick in if CIBC walked.
Adds Sohrab Movahedi, BMO’s bank analyst: “CIBC is incentivized to get a deal done. It is strategically important for them but it’s important that the deal makes everyone unhappy and nobody sad.” He suggests an offer in the US$ 51-$ 52 range would be sufficient.
Two other factors have also played a role in the need for CIBC to up its offer. Firstly three activist investors, (Glazer Capital, Alpine Associates and Westchester Capital) showed up and announced they have rejected the transaction. ( Activists aren’t normally long-term players and want deals to get done — but at higher prices.)
The second factor is that all three U. S. proxy advisory firms ( ISS, Glass Lewis, and Egan- Jones) have i ssued a no- recommendation, a view that some institutional shareholders, but particularly the ETF providers, are required to follow.