The Bank Slate

INSIGHTS INTO THE BANKING INDUSTRY

How Enterprise tapped connections to land California deal

Enterprise Financial Services in Clayton, Mo., had an advocate when it decided to pursue First Choice Bancorp in Cerritos, Calif., earlier this year.

The $10.2 billion-asset Enterprise agreed on April 26 to buy the $2.5 billion-asset First Choice for $398 million in cash and stock. The deal is expected to close in the third quarter.

The conversations began on Jan. 19, when Richard Sanborn introduced Jim Lally, Enterprise’s CEO, and Keene Turner, the company’s chief financial officer, to Peter Hui, First Choice’s chairman. Sanborn had joined Enterprise’s board in November after it bought Seacoast Commerce Banc Holdings, where he had been CEO.

Hui, who knew Sanborn professionally, had already asked him about Seacoast’s experience selling to Enterprise, according to a regulatory filing tied to the proposed Enterprise-First Choice merger. 

“Sanborn’s favorable response culminated in the” introduction to Lally and Turner, the filing said.

First Choice, the filing disclosed, was aggressively pursued by another company for more a year before its introduction to Enterprise.

The company first expressed an interest in August 2019, but First Choice’s board determined that it didn’t need to sell due to the company’s “positive performance and … its prospects for continuing this trend in the future.”

The unnamed company, which had at least $7.7 billion of assets based on details shared in the filing, tried again a year later, pitching an all-stock acquisition and seeking a nondisclosure and exclusivity agreement. First Choice again passed, noting that the overture lacked specifics about the consideration. Uncertainty tied to the coronavirus pandemic was another factor.

First Choice’s board, during a Sept. 24 meeting, took a hard look at the operating environment as it considered the company’s future. While there were plenty of challenges, including the pandemic and pressure from bigger banks, First Choice was on pace to produce record earnings in 2020.

The board “determined that it was not an appropriate time to solicit potential interest in a business combination from potential acquirers,” the filing said.

The unnamed company tried once again to woo First Choice, sending President and CEO Robert Franko a written offer on Jan. 19 that proposed a price of $262 million, or a roughly 15% premium over the company’s stock price at the time.

That was also the day that Sanborn introduced Lally and Turner to Hui.

First Choice’s board decided on Jan. 25 to invite the other company’s president to make a presentation to clarity the terms of the offer, along with perceived risks and benefits.

Lally contacted Franko and Hui on Jan. 26 to seek a meeting to discuss the companies’ businesses and strategic opportunities.

Senior management of the unnamed company made a presentation to First Choice’s board on Jan. 27. While the board decided that the offer was “simply too low in light of First Choice’s positive earnings trends going into 2021,” it decided to form a special committee to evaluate potential mergers.

Hui, Franko, Lally and Turner met on Feb. 2 where they discussed their banks, organizational histories and strategic focuses. While they did not discuss the specifics of a merger, each side expressed interest in continuing to talk.

The filing noted that, around that time, Franko and Hui had spoken with two other companies “to gauge their interest” in a deal, though “neither financial institution appeared particularly receptive to continuing a dialogue.”

Enterprise and First Choice entered into a confidentiality agreement on March 1 that allowed each company to conduct more due diligence. The companies negotiated the terms of a non-binding letter of interest from Enterprise during the second half of March.

Through its investment bank, Enterprise proposed an exchange ratio of 0.655 shares of common stock for each share of First Choice common stock. First Choice counted with a minimum 0.6603 ratio that would give its shareholders a 20% stake in the combined company.

Enterprise on March 22 agreed to the ratio, which translated into a 28% premium over First Choice’s stock price at the time. The letter of intent included a 45-day exclusivity period, which First Choice accepted. 

Enterprise sent an initial draft of the merger agreement to First Choice on April 8. Both companies hoped to complete negotiations in order to time an announcement with the release of their first-quarter earnings. 

First Choice, as part of its due diligence, received information about Enterprise’s executive management team and history of recent acquisitions. Enterprise also provided information on its prospects, loan quality, regulatory compliance, IT and pending litigation. 

First Choice’s board unanimously approved the merger agreement on April 25. Enterprise’s directors unanimously signed off on it the next day. 

The deal is expected to be 8% accretive to Enterprise’s 2022 earnings per share, excluding merger-related expenses. It should take about three years for Enterprise to earn back any dilution to its tangible book value.

Peter Hui will join the Enterprise board. 

The acquisition would strengthen “our commercial banking foundation in the largest economy in the country,” Lally said in a press release announcing the deal.

“I have tremendous respect for the associates of First Choice and the company they have built since its founding in 2005,” Lally added. “They have successfully created a commercially-focused community bank with a demonstrated ability to generate organic growth.”

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