CIBC's Heart Is Set on the USA

While the Canadian lender wasn't as generous as some PrivateBancorp shareholders were hoping, the revised deal terms are adequate.
At Closing, May 25th
114.87 CAD

Finally, a break in the stalemate between Canadian Imperial Bank of Commerce and its U.S. target.

CIBC on Thursday sweetened its offer for Chicago-based PrivateBancorp Inc. by 20 percent to roughly $4.9 billion, a move that I wrote was necessary in light of the rally in bank stocks following November's election. The prospect of stronger economic growth, interest-rate hikes and both regulatory and tax reform under President Donald Trump has buoyed the sector, though it has recently given some back ground on fears his failure to exact changes to health-care laws could be repeated in other policy endeavors. Still, enough of the gains have stuck to justify the bump. 

The tweaked cash-and-stock offer works out to about $61, a notable improvement on the $51 that was on the table as of Wednesday's close. Because of the higher price, the takeover won't become accretive to CIBC until fiscal 2020. The new terms value PrivateBancorp at almost 2.7 times its tangible book value versus 2.2 times previously (which would have seen the transaction add to CIBC's earnings by fiscal 2019). 


CIBC's new offer values PrivateBancorp at the widest premium to the KBW Bank Index in the past 15 months

Source: Bloomberg

*On average, PrivateBancorp's P/TBV multiple has traded at a premium of 0.5 to the broader index. The CIBC offer takes it closer to 0.9

CIBC shareholders may not love the price hike, but there's no reason to revolt. As I've said, the acquisition enables the lender to pursue long-term growth as part of a strategy that will see it lessen its dependence on the Canadian mortgage market while increasing its exposure to rising interest rates across the border. 

While it's not a huge surprise to see CIBC raise its offer, it wasn't a given. In an interview with Bloomberg in December, CEO Victor Dodig said the bank was willing to wait out a market rally to complete the deal. And on an earnings call last month, he emphasized the bank's discipline and patience, likely in an effort to pour cold water on thoughts that the bank would lift its PrivateBancorp bid. He gets a pass for caving this time around because of the strategic merits of this deal, but going forward shareholders should hold him more closely to his word. By taking a hard stance and publicly reversing course, Dodig may even have weakened the bank's negotiating power in future acquisitions, which are logical if CIBC really does want to spread its wings in the U.S. 

O Canada

With potential returns of 9 percent, CIBC shares offer more upside than rivals Royal Bank of Canada, Bank of Montreal, Toronto-Dominion Bank and Scotiabank

Source: Bloomberg

For PrivateBancorp investors uneasy about the recent pullback in bank stocks, there's reason enough to cash out even before the deal is voted on and completed. After all, the stock is trading at just a 1 percent discount to CIBC's new offer. 1  

Take It

PrivateBancorp's sweetened offer from CIBC is above the average price target set by Wall Street analysts

Source: Bloomberg

A spread that narrow indicates that some shareholders are angling for more on the basis that the offer is roughly in line with where PrivateBancorp would trade without a deal. My advice to them? There's no need to be greedy. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. This calculation reflects a ~1.7 percent drop in CIBC shares on Thursday

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net

Before it's here, it's on the Bloomberg Terminal.