The clues of CIBC’s higher bid

Buyback was big hint of move for PrivateBancorp

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.