Canadian Imperial Bank of Commerce is sweetening its bid for PrivateBancorp Inc. by 20 per cent, as buoyant markets thwarted an attempt by the country's fifth-largest lender to wait out a rally in U.S. regional bank stocks.
The amended merger agreement values PrivateBancorp at roughly $6.6-billion (Canadian), or $60.92 (U.S.) per share, the banks said Thursday in a joint news release. Shares of the Chicago-based lender rose 5 per cent to $59 in New York. Its stock has surged almost 65 per cent since last June, when CIBC agreed to buy PrivateBancorp for a mix of cash and stock in a deal worth $4.9-billion (Canadian), or $47 (U.S.) per share.
The blockbuster transaction has been closely watched because it is the cornerstone of CIBC's expansion plans for the United States. It hit a stumbling block late last year when a run-up in U.S. bank stocks after the November election wiped out the premium CIBC had offered to pay. As it became clear the deal would likely be rejected by shareholders, PrivateBancorp postponed its Dec. 8 vote. The delay bought CIBC time to wait and see if PrivateBancorp's stock would fall, but also cast doubt over the deal's fate – mainly whether CIBC would pay more or walk away.
CIBC put that question to rest Thursday, saying it would now pay $2.6-billion (Canadian) in cash and issue roughly 33.5 million common shares. This represents a mix of 40-per-cent cash and 60-per-cent stock.
Shares of CIBC fell 3 per cent to $113.78. The bank is tasked with convincing its shareholders that acquiring PrivateBancorp for $60.92 (U.S.) per share is a prudent use of its capital, even though it offered to buy the same bank last June for just $47 a share.
At an industry event on Thursday in Montreal, David Williamson, the head of Canadian retail and business banking at CIBC, said the bank's decision to offer 20 per cent more makes sense because PrivateBancorp is benefiting from rising interest rates in the United States.
"Our price point has changed, but the interest rate scenario has changed," he said. "I think that's what allowed – in some respects – the economics to stay consistent even with a different price point."
But is CIBC paying too much to seal the deal?
For months, analysts expected that CIBC would hike its offer because walking away from the deal would be more costly , which is looking to expand into the United States to fuel growth. In December, some analysts pegged $55 per share as a potential price that wouldn't put too much strain on CIBC's balance sheet.
But strong quarterly results from both banks gave some analysts reason last month to raise that potential price tag to $60 per share.
The new terms of the deal value PrivateBancorp at almost 2.7 times its tangible book, up from almost 2.2 times under the original terms. CIBC reassured its investors that it can afford to pay more and that it expects to maintain a strong common equity tier (CET) 1 ratio – a key measure of financial health closely watched by regulators – above 10 per cent at closing. As of Jan. 31, its CET 1 ratio stood at a plump 11.9 per cent.
Still, one analyst says the revised offer will get a green light from PrivateBancorp's shareholders, but appears rich and will be a tough pill for CIBC's investors to swallow.
"We believe that this revised offer for PrivateBancorp gets it over the finish line for CIBC. However, we do not believe that investors will necessarily like the cost," wrote John Aiken, an analyst at Barclays Capital Inc., in a research note to clients.
"We do not expect a favourable response and believe that CIBC will only be able to recover the lost valuation after it demonstrates to the market the benefits of the transaction to the bottom line," he added.
PrivateBancorp's investors are expected to vote on the transaction in mid-May. The deal expires on June 29. CIBC will hold its annual meeting on April 6 in Ottawa.