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Streetwise CIBC expected to increase $3.8-billion bid for PrivateBancorp

The large sign outside the CIBC head office at King St. West and Bay St. in Toronto as pictured on April 17 2014.

Fred Lum/The Globe and Mail

Canadian Imperial Bank of Commerce is widely expected to raise its $3.8-billion (U.S.) bid for a U.S. bank, and the question now is whether CIBC can close the ground-breaking deal without overpaying.

CIBC announced a long-awaited U.S. expansion in June by bidding for Chicago-based PrivateBancorp Inc. On Wednesday, PrivateBancorp delayed a shareholder vote on the takeover until the new year, after three proxy advisers recommended that investors reject the current terms. Analysts and rival bankers say the delay gives Canada's fifth-largest lender time to sweeten its bid.

"The first implication of the postponed shareholder vote is a simple one: CIBC will have to pay more to acquire PrivateBancorp," said Peter Routledge, an analyst with National Bank Financial, in a note to clients. "How much more remains an open question."

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Hedge funds and proxy advisers began urging Toronto-based CIBC to increase its bid after U.S. regional bank stocks rallied after last month's U.S. election, pushing valuations higher across the sector and wiping out the premium CIBC was going to pay in a cash-and-shares offer for PrivateBancorp.

When CIBC first rolled out plans to acquire the mid-market private and commercial banking franchise, it took some heat for the robust $47-a-share pricetag. Shares of PrivateBancorp have surged since the deal was announced in the summer, rising again on Thursday to $54.70.

CIBC shares have also rallied by 10 per cent since the U.S. election, on expectations that a Republican president and Congress will slash taxes and cut regulation. Funds specializing in merger arbitrage have taken notice of how steep and sudden the rally has been. (Several of these funds have bought into PrivateBancorp since the deal was announced.) Glazer Capital LLC of New York City published an open letter calling CIBC's offer "a takeunder, not a takeover."

The KBW Regional Bank index, a benchmark for PrivateBancorp shares, has increased 44 per cent since the deal was first announced – a greater one-year move than any year before, including the hits taken during the financial crisis.

CIBC could now bid up to around $55 a share for PrivateBancorp and still do a deal that is attractive to its shareholders, according to analyst Sumit Malhotra at Bank of Nova Scotia. In a report on Thursday, Mr. Malhotra said: "Conversely, walking away from the deal would put CIBC back in the familiar position of being the Canadian 'pure play' looking to deploy capital in the U.S. – only now with prices ~40 per cent higher."

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The challenge facing CIBC, which has struggled with U.S. expansion in the past, is to avoid paying too much for the asset. Royal Bank of Canada also expanded into the U.S. banking market with the acquisition of City National Corp. in a deal some analysts said was at a more attractive valuation to the Canadian buyer than the terms CIBC agreed to pay last summer.

If CIBC pays more than $55 a share for PrivateBancorp, analysts say the takeover becomes less attractive. Above this price, CIBC would likely need to issue more equity to finance the bid than it had initially forecast.

"Since the close is one or two quarters out, we think [CIBC] has the wherewithal to pay the higher amount with cash and not via additional common equity issuance," Mr. Routledge said. "Above $55, we suspect the bank would have to issue more equity and the deal would become more dilutive."

After the PrivateBancorp deal was announced in June, CIBC chief executive officer Victor Dodig told his investors that the Chicago bank was "the right strategic fit" for the bank.

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