Globe and Mail columnist David Berman.The Globe and Mail
Canadian Imperial Bank of Commerce wants to expand into the United States with a deal to acquire Chicago-based PrivateBancorp Inc., but investors will do just fine if the Canadian lender walks away.
CIBC announced the deal last June, when the price tag for PrivateBank, as it is called, was set at $4.9-billion (Canadian) or about $47 (U.S.) a share.
At long last, it seemed, the Canadian bank had found a way to expand beyond its Canadian base, giving it some much-needed geographic diversification and a way to hold on to customers who are pursuing financial relationships across the border. PrivateBank has attractive U.S. commercial banking, private banking and wealth-management capabilities.
Those were innocent days. Since the deal was announced, the share price has surged as investors bet that U.S. financial firms will benefit from an improving domestic economy and rising interest rates. An index of regional banks has risen nearly 50 per cent over the past eight months, to its highest level in at least 13 years. PrivateBank shares now trade at about $57, or more than 20 per cent above CIBC's offer.
The rally puts CIBC in a difficult position: raise its takeover price significantly or face the strong possibility that PrivateBank shareholders will vote against the deal. A vote originally scheduled for December was postponed, and a new date has not yet been announced.
For CIBC shareholders, no deal could be a good deal though. If the Canadian lender walks away from PrivateBank, it would remove the risk of CIBC paying a hefty price for U.S. expansion at a time when financials are on a tear. Walking away would also reward investors financially, because CIBC would likely redirect capital from the acquisition toward shareholders instead.
After CIBC reported its fiscal first quarter results last week, executives said little about its next move, other than restating that PrivateBank would fare better within CIBC.
However, the Canadian lender announced that it had the option of repurchasing up to eight million, or 2 per cent, of its outstanding shares. The buyback amounts to a Plan B.
"We want to make sure that we have every avenue open to us for our shareholders … if we are not able to consummate the deal in this period of time," Victor Dodig, CIBC's chief executive officer, said during a call with analysts.
Admittedly, CIBC would be repurchasing its shares near record-high prices – the stock has risen more than 30 per cent over the past 12 months. But buybacks tend to be popular with investors: With fewer shares outstanding, a company's profit on a per-share basis rises.
Refusing to chase PrivateBank shares higher would also save CIBC from the prospect of overpaying. Right now, PrivateBank shares trade at a considerably higher valuation than CIBC shares, based on trailing profit, estimated profit and book value.
Royal Bank of Canada's CEO, Dave McKay, sounded unenthusiastic about expanding further into the U.S. market during a conference call with analysts last week.
"I mean, you look at the prices of U.S. banks and the run-up there – an ability to generate synergies and a return on capital remains challenging, I would say, at best," Mr. McKay said.
RBC closed its deal for Los Angeles-based City National Corp. in Nov. 2015, when U.S. regional bank share prices were 24 per cent lower than they are today. Some observers had been expecting the bank to make another small acquisition.
If RBC won't chase the rally, why would CIBC?
Admittedly, CIBC is looking at the long-term benefits of gaining a foothold in the United States. As well, prospects for PrivateBank have been rising, making it a more valuable asset today: Consensus one-year profit estimates for the U.S. bank are now 20 per cent higher than they were when CIBC announced the deal last June. Analysts believe the lender has enough capital to raise its price for PrivateBank to at least $60 a share.
But in the near term, investors may be better off if it doesn't.
David Berman