Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

After an eventful 10 months, it's nearly crunch time for PrivateBancorp Inc.'s investors. 

The Chicago-based regional lender agreed to be acquired by Canadian Imperial Bank of Commerce last June, but postponed a vote after it became clear that shareholder support for the deal was waning after the rally in bank stocks following President Donald Trump's surprise election. In March, CIBC upped its bid, and next week, PrivateBancorp shareholders will finally vote on whether or not the new sum is up to scratch. 

Premium
Even before the deal, the owner of Chicago's PrivateBank commanded a premium to regional bank stocks partly due to its above-average profitability
Source: Bloomberg

At the time of the sweetened bid, I wrote that it was enough, a view that was echoed this week by proxy adviser Glass Lewis & Co. LLC. But Institutional Shareholder Services Inc., another proxy adviser, disagrees.

ISS on Monday recommended that investors vote against a deal, arguing that PrivateBancorp shareholders aren't being adequately compensated for what the company is worth on its own. That's partly because CIBC's shares -- which are financing roughly 60 percent of the deal-- have slumped since the deal was re-cut, along with other large Canadian banks which have been dragged down by issues at Home Capital Group Inc., a struggling Canadian mortgage lender. ISS also believes PrivateBancorp will be worth more as a stand-alone company thanks to potential corporate tax cuts out of Washington. 

ISS makes some valid points, but shareholders should remember that by voting in favor of a deal that's majority stock-based, they'll have a claim to future gains that are expected to come from rising interest rates and loan growth. And when it comes to tax reform, Trump's target corporate tax rate of 15 percent may not stick -- whereas CIBC's effective tax rate has been below 20 percent for the past five years:

Now or Never?
CIBC's effective tax rate is already less than half that of PrivateBancorp's, which may be reduced if Trump's tax plan is approved
Source: Bloomberg

PrivateBancorp is trading at a roughly 0.3 percent discount to CIBC's offer price, indicating that investors aren't overly confident that CIBC will lift its bid. But it's unlikely they'd be heartbroken if the bank isn't acquired. After all, first-quarter earnings beat expectations and its profitability metrics exceed some of the biggest banks including JPMorgan Chase & Co. and Bank of America Corp. That lends credence to the idea that the stock -- which is currently trading at a price-to-book-value multiple of 2.4 (above the KBW Regional Bank Index's multiple of 2.1) -- will hold up reasonably well even if a deal is voted down. 

Beat It
By almost any measure, PrivateBancorp's performance is better than the average large U.S. bank
*Data as at Q1, 2017

CIBC has a potential lever to pull: The bank has a buyback program that enables it to buy 8 million of its own shares, a move that would logically boost the price of its stock and lift the takeover value of PrivateBancorp closer to the 2.7 price-to-tangible-book-value multiple that the sweetened offer was worth when it was made. That in turn would make a deal more appealing to the current skeptics. 

If CIBC has its heart set on the deal and with only eight full trading days before next Friday's vote, it better get cracking. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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