Home Capital Woes Hurt CIBC's PrivateBancorp Takeover Plans

(Bloomberg) -- Home Capital Group’s troubles are jeopardizing Canadian Imperial Bank of Commerce’s $5 billion takeover of PrivateBancorp Inc., with a shareholder advisory firm urging investors to oppose the deal, citing the impact of the embattled alternative-mortgage lender as one of the reasons.

CIBC, along with the other four big Canadian banks, has seen its stock price fall in recent weeks, in part because of the run on deposits at Home Capital, Institutional Shareholder Services Inc. said in a report issued Saturday. The alternative lender’s shares have tumbled 70 percent since April 19, when Ontario’s securities regulator accused the firm of misleading investors on disclosures about an internal mortgage investigation.

“While further contagion is not certain, Home Capital’s predicament is not an encouraging sign of the health of the Canadian housing market and the country’s broader financial sector," ISS wrote.

PrivateBancorp would be better off as an independent firm, ISS said.

“The standalone company’s earning power appears to be growing strongly, partly from the favorable macro backdrop of a growing economy and rising interest rates," according to the report. “Potential reductions in taxes and regulations provide optionality to shareholders and could result in increased earnings, higher returns on equity and a higher stock price.”

‘Wrong Conclusion’

“We strongly believe that ISS reached the wrong conclusion,” bank spokeswoman Caroline Van Hasselt said Monday in an emailed statement. “A merger between CIBC and PrivateBancorp is a compelling opportunity that strengthens PrivateBancorp and offers immediate and long-term value for both companies’ shareholders,” she said.

PrivateBancorp is “confident” the CIBC offer is in its shareholders’ best interest and its board “unanimously recommends that stockholders vote for the transaction,” the company said in an emailed statement.

CIBC offered to acquire PrivateBancorp in June but delayed a Dec. 8 shareholder vote on the matter after the Chicago-based lender’s share price climbed along with other U.S. financial institutions following Donald Trump’s election as president.

CIBC sweetened its offer in March by about 20 percent. Under the new terms, CIBC would pay $24.20 in cash and 0.4176 share of its own stock for each PrivateBancorp share, valued at about $60.92 per share when the plan was announced on March 30.

“But in the month since the announcement of the revised terms, evolving market conditions yet again have eroded the premium,” ISS said Saturday in the note, noting the value of the offer was $57.86 on April 27 due to the decline in CIBC’s share price in recent weeks. PrivateBancorp shareholders are scheduled to vote on the offer May 12.

Glass, Lewis

ISS’s conclusion is at odds with another shareholder advisory firm, Glass, Lewis & Co., which recommended last week that PrivateBancorp’s investors approve the transaction. The firm said it based its conclusion on updated fairness opinions on the transactions and a review of the valuations of comparable deals.

“The revised merger consideration represents a reasonably sufficient increase and is financially fair to the company’s shareholders,” Glass, Lewis said in the report. The deal “should enable the combined company to increase its scale and market reach," the adviser said.

As U.S. regional banks have continued to rally, PrivateBancorp’s shareholders would have preferred an auction-type process rather than the negotiated transaction that’s played out over recent months, ISS said. Still, there have been no other suitors to emerge since the transaction was announced. ISS estimates PrivateBancorp is worth about $55.10 a share as a standalone firm, with plenty of upside.

CIBC is unlikely to raise its offer again, according to ISS.

“Although CIBC has never explicitly stated that this represents its best and final offer,” the firm’s proxy indicated its board didn’t plan any further increases, ISS said. “The primary question before PrivateBancorp shareholders is therefore whether CIBC’s sweetened bid represents a more compelling alternative to a standalone scenario.”

CIBC shares increased 0.5 percent to C$110.84 at 11:39 a.m. in Toronto, while PrivateBancorp gained 22 cents to $57.99 in New York.