How the Deal Is Structured
Under the terms of the $445 million deal, Union First Market Bankshares Corp. (NASDAQ:UBSH) will provide StellarOne shareholders with .9739 of a Union First share for every whole share of Stellarone Corp (NASDAQ:STEL) that they own. At Union First’s current share price of about $19.65, this transaction would value each StellarOne share at about $19.13. Relative to StellarOne’s current share price near $18.85, arbitrageurs could snag a premium of as much as 1.5 percent from this transaction.
Complications and Legal Issues
Some of this lingering premium may be the result of the legal challenges that have arisen in response to this deal’s announcement. As is often the case, these challenges center around StellarOne’s shopping period and Union First’s valuation methods. Unsurprisingly, the firms that have spearheaded the investigations make the argument that StellarOne’s management team failed to solicit adequate bids for the company’s assets. Moreover, they allege that Union First has substantially undervalued those assets in its initial offer.
At this point, no lawsuits have been filed. It is unclear whether a serious challenge will arise to delay or scuttle the merger. For now, investors should keep a close eye on these developments and use news-related dips in StellarOne’s stock price to extend their exposure to the deal.
Potential Synergies and Other Advantages
This deal has the potential to produce some interesting synergies that should be apparent to investors with little insider knowledge of the banking industry. Union First and StellarOne have very similar business models and conduct their operations within a common geographical area. Neither firm is large enough to exercise significant pricing power over the larger competitors that do business in the mid-Atlantic states, and ongoing consolidation within the retail banking industry is not likely to favor their small-bore business tactics. As such, a combination that produces a company with over $300 million in annual revenues and nearly 150 branches across Virginia would represent a major improvement on the current situation. The fact that the deal is too small to attract significant regulatory attention is an added bonus.
Worth a Closer Look?
In sum, this deal’s arbitrage opportunity should make it attractive to short-term traders. For long-term investors, Union First’s 2.6 percent yield and relatively stable profits should provide some encouragement. If these companies can leverage this merger’s synergies to create a major player in the Virginia banking sector, investors across the continent are apt to benefit. However, anyone who finds this deal attractive should take a closer look at its particulars to determine its likelihood of closing. An unexpected setback could wipe out many players’ investment theses and cause substantial losses.
Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article How Will This Controversial Play Affect Regional Banks? originally appeared on Fool.com is written by Mike Thiessen.
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