Politics Buffet a Merger of Banks -- WSJ

By Christina Rexrode and Jacquie McNishFeaturesDow Jones Newswires

CIBC's deal to buy PrivateBancorp has been plagued by vote-fueled volatility

The Trump election was supposed to jump-start new interest in bank mergers. But for one deal, all it has done is create headaches.

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Nearly 10 months after Canadian Imperial Bank of Commerce unveiled a $3.8 billion cash and stock agreement to acquire Chicago-based PrivateBancorp Inc., the Toronto bank is still campaigning to win shareholder support for a deal that has been plagued by volatile market moves following election outcomes.

Days before CIBC unveiled its deal last June, valuing PrivateBancorp at about $47 a share, the U.K.'s vote to leave the European Union sent bank stocks sliding, prompting some analysts to question whether the Canadian bank could generate enough synergies to justify the acquisition cost.

In November, the banks had a different problem when Donald Trump's surprise election ignited a sharp run-up in U.S. bank stocks. Since then, some shareholders have complained that CIBC's offer was insufficient.

On Thursday, PrivateBancorp said that its quarterly earnings rose, beating expectations. The Canadian bank has been bracing itself for pressure to improve its offer again if PrivateBancorp's results were strong enough to push the stock higher. Last month, CIBC bowed to pressure by sweetening the value of its offer by about $1 billion to a deal valued as of Thursday at about $4.8 billion.

Analysts are split over what to expect May 12, when PrivateBancorp shareholders are scheduled to vote on the deal. A spokeswoman for CIBC said Wednesday that the bank is "comfortable with our offer and continues to believe the merger is a compelling opportunity for both companies."

PrivateBancorp, which operates offices mostly in the Midwest under its PrivateBank unit, said Thursday in its earnings release that it is "excited to join the CIBC family."

It has been a long road. No other bank deals announced in the first half of 2016 are pending, according to data provider Dealogic. So far this year, 77 U.S. bank deals have been announced, valued at nearly $11.9 billion, an increase from the same time a year ago, when 68 deals valued at $7.7 billion had been announced.

Even if the deal gets shareholder approval, it still requires the blessing of the Federal Reserve, Illinois financial regulators and Canada's Office of the Superintendent of Financial Institutions. The banks expect the deal to close in the second quarter.

Under normal circumstances, a deal to buy PrivateBancorp might have been barely a blip on the banking radar. But the run-up in U.S. bank stocks after the election has upped its visibility. Since the U.S. vote, the company's shares have risen about 30%, compared with CIBC's 11% gain.

CIBC's determination to close the PrivateBancorp acquisition underscores the pressure Canadian banks face in their home market, which has experienced sluggish growth due to the commodities price rout. CIBC is more exposed to the frailer economy than its peers as more than 85% of its earnings are generated in Canada.

The deal has drawn high-powered hedge-fund investors. Daniel Loeb's Third Point LLC invested in PrivateBancorp late last year and recently had a 3.75% stake, according to research firm FactSet. Another investor, Glazer Capital LLC, said in an open letter to fellow shareholders in December that PrivateBancorp should push for better terms because there had been a "seismic shift" in bank valuations since the deal was first announced. Both Third Point and Glazer Capital declined to comment.

Chris McGratty, an analyst at Keefe, Bruyette & Woods, said he would vote no if he were a shareholder. He calculates that PrivateBancorp has a stand-alone value of about $63 a share, and that a buyer should plan to spend a premium price of $70. CIBC's current offer valued PrivateBancorp's shares at about $59 as of Thursday's closing price.

On Thursday, PrivateBancorp's shares rose 0.3%, to $58.61.

Other analysts say the CIBC offer is fair. And Mr. McGratty said it might be enough to satisfy hedge-fund investors looking for a quick profit. "For them, it's a bird in the hand," Mr. McGratty said.

Bank stocks soared in the U.S. in the days after the election because they were judged to benefit from the prospect of looser regulation and more economic growth. The gains have stalled since March as the administration's ability to follow through on some of its plans has been doubted. The uncertainty could scare off some potential bank buyers or cause others to rethink their strategy.

Still, it's rare for shareholders to vote down a deal. CIBC's Chief Executive Officer Victor Dodig said in a conference call last year that he expects U.S. earnings to double to more than 10% of overall earnings when the PrivateBancorp deal is completed.

Write to Christina Rexrode at christina.rexrode@wsj.com and Jacquie McNish at Jacquie.McNish@wsj.com

(END) Dow Jones Newswires

April 21, 2017 02:48 ET (06:48 GMT)