I am recommending BTC warrants, which are trading now at 50
cents. Community Bankers Acquisition
Corp(BTC) is a SPAC IPO’d in March 06 with the goal of acquiring a bank. Assets held in trust are $57mm. This morning they announced their deal, a
proposed merger with Transcommunity Financial Corp(TCYF). TCYF is a small bank created in 2002 that
currently has $30mm in equity. This deal
would give them a large capital infusion.
Will try to keep this short.
Terms were that each TCYF share receives 1.42 shares of
BTC. The math and valuation works out as
follows:
4.6mm TCYF shares out * 1.42 = 6.53 mm shares NewCo +
9.375mm BTC shares out =
15.9mm shares Newco.
TCYF currently has equity of $30mm, when you add the $57mm
held in trust at BTC you come up with $87mm in total equity at Newco. $87mm/15.9mm shares = $5.47 book/sh. Current held in trust value at BTC is $7.71
so BTC holders are essentially paying 1.4x book(7.71/5.47) in order to acquire
an operating bank that will allow them to put their $57mm in capital to
use. If you assume 15% of holders opt
out then book value goes to $5.34 and you are paying a 1.45x book
valuation.
As most VIC readers probably know these deals get approved a
vast majority of the time given the incentives that management has and the ways
they can wrangle the votes in their favor(including reducing the shares they
receive). For example, the BTC founders
could give up some of their shares to ensure the deal gets done. If they reduced their share count by half
then the per share book value would increase to 6.04 and the valuation would decrease
to 1.3x book.
Relative to some other deals selling a bank at 1.3x-1.5x
book doesn’t seem like a very hard sell.
TCYF has been trading anywhere from 1.1x book to 1.3x book so they pay a
little premium but at the same time the capital infusion should allow them to
improve their performance in the future given how small they are now. I would think the chances of the deal going
through are good. So what are the
warrants worth?
The warrants are currently trading at $0.50 with a strike
price of $5. They expire on 6/4/11 and
can be redeemed if the common stock is at $11.50(which won’t make anyone
complain since the warrants would be at $6.50 a piece). I’ll lay out the leverage inherent in these
warrants based on what multiple the merged bank trades at.
|
Price/Book
|
Warrant Intrinsic Value
|
|
1.0x
|
$0.34
|
|
1.1x
|
$0.87
|
|
1.2x
|
$1.41
|
|
1.3x
|
$1.94
|
|
1.5x
|
$3.01
|
|
2.0x
|
$5.68
|
This ignores time value which is significant given that the
warrants have high leverage and that there is almost 4 years until they
expire. Even if the common tanks and
trades at 1x book you won’t lose money and you hold a free and highly leveraged
4 year option on their ability to improve performance after they receive the capital
infusion.
The obvious risk is that the deal is not approved and the warrants
expire worthless. It’s not possible to
put a precise number on this risk but given past history with SPACs and the
valuation on this deal I feel there is a good chance of the deal going
through. When you combine that with the
possible upside if the deal gets approved then the warrants look compelling at
50 cents.