Banking & Finance

BAIT SHOP Update After Wells Fargo Goes Shopping

Stock Tickers: PLSB, WFC, FCBP, USB

Placer Sierra Bancshares (PLSB) is being acquired by Wells Fargo (WFC) in an all stock merger under different terms than a normal bank buyout from a megabank of a focused regional micro-cap bank.  PLSB was not the BAIT SHOP pick because it had been screened out for valuations and in favor of other plays in better parts of California, so read beyond the general summary of the deal to see the rationale for the updating of our older BAIT SHOP pick from 2005 that is actually still active as a cast member on the BAIT SHOP among other regional financial institutions.

The merger has stock price ratio bands.  If the Wells Fargo measurement price is between $32.5783 and $39.8179, the exchange ratio will be determined by dividing $28 by the measurement price.  If the Wells Fargo measurement price is equal to or less than $32.5783, then the exchange ratio will be 0.8595. If the Wells Fargo measurement price is equal to or more than $39.8179, then the exchange ratio will be 0.7032.  This makes the middle initial range give the total value of the transaction approximately $645 million, roughly a 20% premium to the $527 million market cap as of PLSB’s close.

As of today’s close PLSB had a 19.2 P/E ratio, which isn’t cheap for a bank even if you consider the premium placed on Western regional banks.  Its dividend yield was 2.6%.  Wells Fargo has a P/E short of 15 and a dividend yield of 3.1%.  The price to book value was fairly low if you can trust it as it went out today at 1.33, so this is an implied 1.5 times book value merger, while Wells Fargo has a stated price to book ratio of more than 2.0.  Since Wells fargo is worth more than $100 Billion in market cap it makes you wonder the deal wasn’t just in cash or on a fixed stock price, but that was probably conditionally set by Placer’s board.

The Small-Cap Banking BAIT SHOP member for the West Coast has been for more than a year, and still is:

Unfortunately, this was not the bank in the Pacific SouthWest that I had earmarked for a takeover.  The bank that had been earmarked for acquisition as a BAIT SHOP stock in the region is First Community Bancorp (FCBP), although this Wells buyout of Placer makes this look even cheaper if you can make some implied calculations ahead.  It is not without problems by a long shot, and this is one of those regional banking plays that may have overstayed its welcome on the BAIT SHOP.  The bank made two other acquisitions in 2006 and made several other acquisitions in years 2003 to 2005.  Upon placing this one into the BAIT SHOP the implied hedge at the time was that if a larger bank or money center bank didn’t step in that the company might just actually grow itself into a monster on its own buying spree.  Its chart was in need of a breather, but that anticipated breather was the reason for looking at this one as a buyer. 

First Community operates in San Diego as First National Bank, Pacific Western National Bank from L.A. to San Francisco.  It is listed as cheap for a reason, and that is because its readings no longer are reflective since First Community is the new merged amalgamation of these two smaller regional plays and many more beforehand.  One of the main reasons this one made sense was because of the growth happening in and around San Diego, and a larger bank can look past the “California housing” woes to get a larger foothold in the area.  FCBP  has an implied market cap of $1.5 Billion with a P/E of under 16 and price to book ratio of under 1.42; and a dividend of 2.5% roughly (recently raised). 

This recently completed merger should have probably created a removal from the BAIT SHOP but this one still makes sense financially and I have not removed it.  Trust me when I say it stinks having to wait to see the new formal books and that is not a norm for the BAIT SHOP when there are so many regional plays out there.  Management of the bank is also a bit young, and younger management in theory is more likely to think like an acquirer (forgive my opinion if you are older). 

The closing price today was $50.91, and the 52-week high was $61.65.  This one was added in December of 2005 at $53.00, so even though it was up $7.00 or about 14% it is actually not a profitable position in the BAIT SHOP now if you don’t count the dividend.  A chartist wouldn’t be all that crazy about the chart right now either, and it will have to go on a watch list for an potential exit from the position even though on a sans-dividend basis it appears as a loser.  After Vail Banks was acquired by USBancorp (USB) this one remained on the list even though it was June 2006 when FCBP was around $60.00.  The new company may be too new for many to look at and there are now some ownership percentages that could make this one a bit tougher to do, but at the time it was added to the BAIT SHOP it made sense and the rationale hasn’t really changed in my mind on a longer-term perspective.  Because of all the roll-ups you have to always be able to absorb some occasional “charge-offs,” and that is something that hasn’t been too high to merit a removal from the BAIT SHOP.

The company has also hired an advisor at the end of 2006 that is meant to look for more deals down the road, but there is a comealong clause that the advisor is compensated IF FCBP is acquired too.  It is unfortunate that there are no stock options that can be used to hedge, but that often happens in smaller banking companies.  As noted, the hedge here is that based on operating and its buying history they may just grow into a larger regional We have many more bank stocks in the regional arena that are buyout candidates in the BAIT SHOP.  If you would like to sign up for our our free email newsletters in the BAIT SHOP and other special situations investments and some IPO’s please send an email to and label the email SUBSCRIBE or SIGN-UP.  We value privacy and do not share our email or client lists with any third parties.

Jon C. Ogg
January 10, 2007

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