National Post (National Edition)
Complaints on VersaBank deal
The terms of the merger between the country’s smallest chartered bank — London, Ont.based VersaBank — and its holding company parent PWC Capital Inc., a transaction that was announced in mid-September and which will now be decided at a meeting on Dec. 30, have already been revised once.
That change occurred this week when the exchange ratio for converting PWC common shares and Series C notes issued by PWC into shares of Versa was altered. The change, the bank said, was made because of “a review of the financial model” and feedback from holders of PWC securities.
The transaction is very complicated because it involves, for the first time, a merger between a Canada Business Corporations Actincorporated company and a chartered bank. As well, multiple securities are involved, with plans calling for some of the debt issues to be converted to VersaBank shares. Indeed, a number of steps have to be taken prior to the amalgamation, including the buying back of senior debt advanced by the major shareholder.
The merger, which followed a strategic review, is meant to lead to “a simplified structure, increased liquidity and greater access to capital,” said David Taylor, VersaBank’s chief executive, in September.
Taylor is also chief executive at PWC Capital.
But getting there has been quite the rise, as this week’s update proved. As a result of that change, it will now take more PWC common shares to receive a VersaBank share (the comparative numbers are 54.509 versus 36.652) while holders of the $62 million of Series C convertible notes issued by PWC will now be offered 137.009 VersaBank common shares for each $1,000 note. Previously, they were offered VersaBank shares — but at a higher conversion price.
While a simplified structure is a desirable goal — after the deal PWC will own 65 per cent versus 62.8 per cent prior — at least one noteholder argues more change is required to get a fair deal.
“The amended deal moves a bit of value from the PWC equity to the PWC notes, which is incrementally better,” said the holder. “But it does not address the fact that PWC common shareholders are still receiving value, the pref holders are receiving full value, while the notes are not receiving full value,” he added. “The rule of priority would indicate that we should get paid in full, which would be par value plus accrued but unpaid interest.”
Under that calculation, and assuming a pro-forma book value of $7.25 a share, the noteholders would receive about 147 shares. “Those extra 10 shares would have to come from either the pref shareholders or the common shareholders,” he added.
The problem arises because of the gap between VersaBank’s book value and what an investor would pay for the same shares in the market. In its third-quarter financials, VersaBank determined book value per share on July 31 at $7.72. Those same shares were changing hands in the market Friday at $5.03.
Some would argue that the low price arises because of the complicated ownership structure. The market has had a chance to look at this transaction, which would remove that complication, and has reached a different conclusion, given that the share price is lower now than it was at the time the deal was announced.
On the other hand, the share price may rebound if the deal is approved and if the substantial tax losses available at PWC are transferred to VersaBank.