The clues of CIBC’s higher bid

Buyback was big hint of move for PrivateBancorp

National Post (National Edition) - - FINANCIAL POST - BARRY CRITCH­LEY Fi­nan­cial Post bcritch­ley@post­media.com

Along the way, there have been some clues, the odd bit of news, some signs that in­di­cated a new deal was be­ing worked on — but un­til Thurs­day there was noth­ing def­i­nite that Cana­dian Im­pe­rial Bank of Com­merce was rein­ter­ested in ac­quir­ing Chicago-based PrivateBancorp.

Al­most four months back, the U.S. tar­get post­poned a spe­cial share­hold­ers meet­ing called to vote on the cash and pa­per of­fer from CIBC. Made in June, 2016, the of­fer would pay US$18.80 in cash and 0.3657 of a CIBC share for each PrivateBancorp share. But the sharp jump in re­gional banks stocks fol­low­ing the elec­tion of Don­ald Trump meant CIBC’s of­fer — orig­i­nally val­ued at US$47 a share — was in­ad­e­quate.

So the par­ties re­treated and pre­sum­ably worked on a new trans­ac­tion that, to get over the line, would re­quire a higher value to be placed on each PrivateBancorp share. Thurs­day, CIBC duly re­sponded with a new of­fer: US$24.20 in cash and 0.4176 of a CIBC share for each share of PrivateBancorp — a value of US$60.92 a share.

That CIBC would make a new of­fer was prob­a­bly not a real sur­prise: In­deed if the orig­i­nal of­fer was part of a strat­egy — by grow­ing out­side of Canada through se­lec­tive ac­qui­si­tions — then would walk­ing away mean a change in strat­egy?

One sign that some­thing was un­der­way emerged a few weeks back when PrivateBancorp an­nounced a meet­ing date (May 4) to vote on the CIBC of­fer. Given that the orig­i­nal of­fer was un­der­wa­ter, that de­ci­sion may have been de­signed to put some heat on CIBC: ei­ther up the ante or risk hav­ing the share­hold­ers throw out the deal. And no self-re­spect­ing in­sti­tu­tion wants to be a two-time loser.

In the view of one wellplaced mar­ket par­tic­i­pant a ma­jor clue that the plan was on track came about six weeks back when CIBC an­nounced a nor­mal course is­suer bid. The bank wanted to buy back eight mil­lion of its own shares (about two per cent of the out­stand­ings) — and can­cel them. CIBC’s pre­vi­ous nor­mal course is­suer bid — also for eight mil­lion shares — ex­pired in Septem­ber, 2106. (Un­der that bid, CIBC bought back 3.2 mil­lion shares.)

The fact it was re­ac­ti­vated af­ter a five-month de­lay sent a sig­nal — and a pos­si­ble in­di­ca­tion of how much more CIBC was pre­pared to pay.

Given that CIBC would be is­su­ing its own shares to ac­quire PrivateBancorp, the ar­gu­ment ran that the bank would want to off­set that is­suance by buy­ing back 8 mil­lion shares in the mar­ket. At the time of the an­nounce­ment CIBC was trad­ing at around $120 a share — mean­ing that it could pay up to an­other $1 bil­lion, pro­vided that the cash com­po­nent of the of­fer didn’t change. (CIBC will pay about US$430 mil­lion more in cash than pre­vi­ously planned.) As things turned out, CIBC was re­quired to pay more than $1 bil­lion — the value of the 8 mil­lion shares un­der the nor­mal course is­suer bid.

But CIBC stands to get more from the ac­qui­si­tion than pre­vi­ously ex­pected, pre­sum­ably be­cause in­ter­est rates are ex­pected to move higher. Thurs­day, CIBC said it ex­pects to de­rive US$340 mil­lion of net in­come in fis­cal 2020 “and be­come ac­cre­tive to CIBC’s earn­ings per share.”

On the pre­vi­ous of­fer, CIBC ex­pected the trans­ac­tion to be “ac­cre­tive” to ad­justed earn­ings per share in year three. In a pre­sen­ta­tion it spoke of a $400-mil­lion boost to the bank’s net in­come by 2020.

But as an in­di­ca­tion that mat­ters rarely pro­ceed as planned: the spe­cial meet­ing of PrivateBancorp’s share­hold­ers will now be held in “mid-May.” But there is one con­stant: the record date will re­main March 31.

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