Author Topic: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage  (Read 4147 times)

Foreign Tuffett

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CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« on: January 25, 2018, 09:06:16 AM »
Commerce Bank of Temecula Valley (CKTM - note that like many tiny banks, they do not file with thr SEC) is being acquired by Nano Financial for $14.41 per share, with the transaction scheduled to close in mid-2018. CKTM is trading at $13.40, which I view to be an overly large discount to the deal price, given the strong probability that the transaction occurs. If the acquisition closes as scheduled, the IRR will be around 15% assuming a 6 month holding period.

Here's why I think this is a good investment idea:

1) Enrique Schon owns ~34% of CKTM's outstanding shares. He is on the board, as are his son and daughter.

http://www.northbaybusinessjournal.com/industrynews/7220615-181/shareholders-in-april-killed-the

2) In 9/2016 CKTM announced it was selling itself to AltaPacific bank. However, in 4/2017 CKTM's shareholders voted down the acquisition, causing the transaction to fall apart.

https://www.apbconnect.com/altapacific-bancorp-and-commerce-bank-temecula-valley-sign-definitive-agreement-merge

https://www.businesswire.com/news/home/20170417005981/en/AltaPacific-Bancorp-Terminates-Merger-Agreement

3) The reason the attempt to sell the company to AltaPacific failed is that Schon opposed it. Obviously it's tough to win a vote like this when a board member who owns such a large chunk of the company is opposed.

http://www.northbaybusinessjournal.com/northbay/sonomacounty/6758724-181/sonoma-altapacific-bank-merger-growth

4) Donald W. Murray, Chairman and CEO of CKTM, leaves the bank in the aftermath of the failed sale. His replacement, Scott R. Andrews, is appointed in 9/2017.

https://www.businesswire.com/news/home/20170915005181/en/Commerce-Bank-Temecula-Valley-Appoints-Scott-R.

5) At the end of last year the sale to Nano Financial is announced. Note that it's at a much higher deal price than the the AltaPacific deal ($23.3 million vs. $15.9 million). The press release states that "The offer to purchase received unanimous approval from Commerce Bank of Temecula Valley’s board of directors." The 1/3/2018 CKTM press release features similar language. This means Schon approves of this transaction and will (almost certainly) vote his shares accordingly.

https://www.businesswire.com/news/home/20171229005421/en/Nano-Financial-Holdings-Acquire-Commercial-Bank-Southern

https://www.businesswire.com/news/home/20180103006261/en/Commerce-Bank-Temecula-Valley-Shareholder-Letter


5) Note that two other members of the board are "founding shareholders." They probably both own significant amounts of shares. It wouldn't surprise me if the board, in total, owns an outright majority of outstanding shares. With a higher deal price and the board unanimous in support, I think the shareholder vote is going to be little more than a formality. Also, I can't think of any obvious reason(s) why CKTM shareholders would oppose the sale.

https://www.commercebanktv.com/aboutus.asp

6) Nano Financial Holdings has "raised more than $60 million in stock subscriptions." So Nano should have the cash to complete the transaction. Also, here's how Nano describes itself: "Nano Financial Holdings, Inc. is an unlisted special purpose acquisition company that was formed to acquire one or more commercial banks in California. The company was founded in 2017 and is based in Irvine, California." Nano needs to own a bank in CA to execute its strategy. If this acquisition doesn't close Nano is back to square one, and will have to hunt for another CA bank to acquire.

https://marketintelligence.spglobal.com/our-thinking/news/nano-financial-to-offer-security-that-community-banks-dont-typically-provide

7) Re the shares vs. cash at acquisition close issue that I think is partly responsible for the gap between market price and deal price: I think minority outside shareholders will get cash. From the 1/3/18 CKTM press release (linked to above): "Under the terms of the agreement, CBTV shareholders will have the right to receive $14.41 per share in cash." I think the "certain accredited CBTV shareholders agree to exchange a portion of their CBTV shares of common stock for newly issued shares of Nano Class A Common Stock" language in the release is referring to certain insiders and large shareholders like Schon. Non-accredited outside shareholders who own a small blocks of stock shouldn't fall under language like this. Also, Nano Financial is a privately owned SPAC-type entity that only accredited investors can own. Small private investors almost certainly aren’t eligible to own it under SEC rules, which should preclude shares in it being transferred indiscriminately to CKTM shareholders.






oddballstocks

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #1 on: January 25, 2018, 09:54:50 AM »
Commerce Bank of Temecula Valley (CKTM - note that like many tiny banks, they do not file with thr SEC) is being acquired by Nano Financial for $14.41 per share, with the transaction scheduled to close in mid-2018. CKTM is trading at $13.40, which I view to be an overly large discount to the deal price, given the strong probability that the transaction occurs. If the acquisition closes as scheduled, the IRR will be around 15% assuming a 6 month holding period.

Here's why I think this is a good investment idea:

1) Enrique Schon owns ~34% of CKTM's outstanding shares. He is on the board, as are his son and daughter.

http://www.northbaybusinessjournal.com/industrynews/7220615-181/shareholders-in-april-killed-the

2) In 9/2016 CKTM announced it was selling itself to AltaPacific bank. However, in 4/2017 CKTM's shareholders voted down the acquisition, causing the transaction to fall apart.

https://www.apbconnect.com/altapacific-bancorp-and-commerce-bank-temecula-valley-sign-definitive-agreement-merge

https://www.businesswire.com/news/home/20170417005981/en/AltaPacific-Bancorp-Terminates-Merger-Agreement

3) The reason the attempt to sell the company to AltaPacific failed is that Schon opposed it. Obviously it's tough to win a vote like this when a board member who owns such a large chunk of the company is opposed.

http://www.northbaybusinessjournal.com/northbay/sonomacounty/6758724-181/sonoma-altapacific-bank-merger-growth

4) Donald W. Murray, Chairman and CEO of CKTM, leaves the bank in the aftermath of the failed sale. His replacement, Scott R. Andrews, is appointed in 9/2017.

https://www.businesswire.com/news/home/20170915005181/en/Commerce-Bank-Temecula-Valley-Appoints-Scott-R.

5) At the end of last year the sale to Nano Financial is announced. Note that it's at a much higher deal price than the the AltaPacific deal ($23.3 million vs. $15.9 million). The press release states that "The offer to purchase received unanimous approval from Commerce Bank of Temecula Valley’s board of directors." The 1/3/2018 CKTM press release features similar language. This means Schon approves of this transaction and will (almost certainly) vote his shares accordingly.

https://www.businesswire.com/news/home/20171229005421/en/Nano-Financial-Holdings-Acquire-Commercial-Bank-Southern

https://www.businesswire.com/news/home/20180103006261/en/Commerce-Bank-Temecula-Valley-Shareholder-Letter


5) Note that two other members of the board are "founding shareholders." They probably both own significant amounts of shares. It wouldn't surprise me if the board, in total, owns an outright majority of outstanding shares. With a higher deal price and the board unanimous in support, I think the shareholder vote is going to be little more than a formality. Also, I can't think of any obvious reason(s) why CKTM shareholders would oppose the sale.

https://www.commercebanktv.com/aboutus.asp

6) Nano Financial Holdings has "raised more than $60 million in stock subscriptions." So Nano should have the cash to complete the transaction. Also, here's how Nano describes itself: "Nano Financial Holdings, Inc. is an unlisted special purpose acquisition company that was formed to acquire one or more commercial banks in California. The company was founded in 2017 and is based in Irvine, California." Nano needs to own a bank in CA to execute its strategy. If this acquisition doesn't close Nano is back to square one, and will have to hunt for another CA bank to acquire.

https://marketintelligence.spglobal.com/our-thinking/news/nano-financial-to-offer-security-that-community-banks-dont-typically-provide

7) Re the shares vs. cash at acquisition close issue that I think is partly responsible for the gap between market price and deal price: I think minority outside shareholders will get cash. From the 1/3/18 CKTM press release (linked to above): "Under the terms of the agreement, CBTV shareholders will have the right to receive $14.41 per share in cash." I think the "certain accredited CBTV shareholders agree to exchange a portion of their CBTV shares of common stock for newly issued shares of Nano Class A Common Stock" language in the release is referring to certain insiders and large shareholders like Schon. Non-accredited outside shareholders who own a small blocks of stock shouldn't fall under language like this. Also, Nano Financial is a privately owned SPAC-type entity that only accredited investors can own. Small private investors almost certainly aren’t eligible to own it under SEC rules, which should preclude shares in it being transferred indiscriminately to CKTM shareholders.

Thanks for the heads up on this one, picked up some shares.

Two options here:
1) Scalp the ~$1 per share. Make a little cash.
2) Receive Nano Financial shares and enjoy the ride.

I need to dig into Nano a bit, but the formula they're going to follow here is clear.  Buy three under performing banks for about $20m each, combine them, reduce costs and create a much more valuable financial service company.

Typically what happens is you buy these small banks, grow them to a few hundred million in assets apiece then sell away.

If the people running Nano have done this before then the $60m they're raising now will probably become $150m or $200m in an eventual sale.

I'm trying to find the names of the people doing this.  If you take stock in Nano then maybe Nano will get the ticker from this?
The ultimate edge for bank investors: http://www.completebankdata.com

JayGatsby

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #2 on: January 25, 2018, 01:27:37 PM »
Well researched, Foreign Tuffett. I own a few shares of this. I agree it seems like a very high likelihood.

TBW

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #3 on: January 29, 2018, 02:01:56 AM »
Really interesting idea!  Thanks.

CKTM seems well managed, with very cheap deposit base but under scaled and under leveraged.  Makes sense as a target.  Price paid of 1.7x book is high, but looks like the buyers sold California Republic for ~2x book (my guesstimate from limited info).  So they likely think they can add more value.  They also have the cash and need to start investing.

My only question is what would break up this deal?  Schon changes his mind, something comes up in the due diligence, any other reasons?

On breakup this likely trades back to book value.  That's not too bad.

landstander

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #4 on: March 07, 2018, 01:21:26 PM »
Meeting to vote on the merger has been scheduled for April 12th. Seems to me that everything is moving along with the board unanimously recommending shareholders vote for the merger.

With regard to whether shareholders will receive $14.41 or Nano shares, I believe this confirms minority share holders will be the ones receiving cash -
Quote
...four shareholders have agreed to enter into exchange and subscription agreements with respect to 419,010 shares of Commerce Bank common stock or 26% of the outstanding shares of Commerce Bank.

Thanks for the idea Foreign Tuffett!

https://www.commercebanktv.com/CBTV_ProxyStatement2018.pdf

siddharth18

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #5 on: May 01, 2018, 01:03:56 PM »
Looks like it's expected to close tomorrow? No trading or bids today. Description at TDAmeritrade shows:



Hielko

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #6 on: May 01, 2018, 01:13:25 PM »
Means the merger has closed already, and payment is on it's way. Possible tomorrow, but could take a bit longer as well.

Schwab711

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #7 on: May 01, 2018, 01:41:29 PM »
Great post and thanks for the idea, FT!

snow pea

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #8 on: May 01, 2018, 02:40:19 PM »
Yes, many thanks! 

chesko182

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Re: CKTM - Commerce Bank of Temecula Valley Merger Arbitrage
« Reply #9 on: May 01, 2018, 03:56:44 PM »
many thanks, this was probably one of the quickest investment decisions I took. A nice cash parking spot...

saludos
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