Acquisition offer for Company 5

An acquisition offer for “Company 5” (published on VIB premium on June, 28) was made yesterday. Company 5 is County First Bank (OTCMKTS:CUMD) and is being acquired by The Community Financial Corporation (NASDAQ:TCFC), which is a larger, Nasdaq-listed bank. The press release can be found here.

The share price has increased by 64% since the write-up was released and the investment thesis is obviously no longer interesting for premium members to purchase. I have therefore disabled purchases for this write-up and have now made it available on the public blog:

Click here to read the write-up on County First Bank (CUMD).

I believe the purchase price (excluding any potential contingent consideration) is around 1.34x book value as of March 31, 2017. I am pleased that this amount is right around the upper level that I thought another bank might pay. The fairly low insider ownership of the individual directors was a concern for me and I felt this decreased the chance somewhat of the scenario that is now unfolding. This offer does give me confidence that I’m fishing in the right pond with these small banks and that I shouldn’t worry too much about catalysts and just focus on buying them cheap.

CUMD might now be an attractive merger arbitrage situation:

County First Bank shareholders will be entitled to receive 0.9543 shares of The Community Financial Corporation common stock and $1.00 in cash for each share of County First Bank common stock they hold. County First shareholders may also receive, in the aggregate, additional contingent cash consideration of up to $2,154,303 (representing a maximum potential per share value of $2.24) based upon the resolution of certain identified assets prior to closing. There can be no assurance that County First will sell, resolve or otherwise dispose of any of the identified assets or that County First shareholders will receive any contingent cash consideration.

(bold text mine)

At the current TCFC share price of $36.64, the merger consideration should be $35.96 and the spread is currently 5.6%. This excludes the potential additional contingent cash consideration of up to $2.24 per share. The contingent consideration could bump up the upside to a maximum of around 12% at current prices. The merger is expected to close in the fourth quarter of 2017 or early in the first quarter of 2018.

I think this looks pretty attractive at first glance, but I’ve not looked at this transaction in detail yet. Also, with this acquisition offer my position has now become a bit larger than typical for my community bank stocks and merger arbitrage situations, so I’ll have to take that into consideration as well.

Disclosure: long County First Bank (OTCMKTS:CUMD)