The Bank Slate


How Old National prevailed in effort to buy CapStar in Tennessee

A higher premium and a stronger dividend history helped Old National in Evansville, Ind., secure the winning bid to buy CapStar Financial Holdings in Nashville, Tenn.

The $49 billion-asset Old National agreed on Oct. 26 to buy the $3.3 billion-asset CapStar for $344.4 million in a deal expected to close in the second quarter. The deal was among the five biggest bank mergers announced in 2023.

CapStar’s strategic alternatives committee seriously considered two offers in early October before deciding to negotiate with Old National, according to a regulatory filing tied to the pending merger.

The story behind the pending sale goes back to September 2022, when CapStar’s board authorized senior management to explore a merger. The process hit a snag in the spring as interest rates spiked and high-profile bank failures spooked the markets.

“CapStar’s and other parties’ senior management teams were focused primarily on weathering through the challenging economic environment,” the filing said.

The process got back on track in mid-July when CapStar formed a strategic alternatives committee. Within weeks, the company had a nonbinding written indication of interest and a verbal indication of interest from two unnamed financial institutions. The committee determined that the written proposal was “adequate” enough to justify further discussions.

The committee also authorized CapStar’s investment bank to initiate discussions with Old National and another unnamed financial institution. CapStar in mid-September entered into confidentiality agreements with Old National and two other suitors. CapStar requested that each suitor submit offers by Oct. 9.

Old National’s all-stock offer included a 1.124 exchange ratio, which represented a roughly 10% premium to CapStar’s stock price on Oct. 9. The other offer CapStar received had a roughly 2% premium.

In addition to the higher premium, the CapStar committee chose to work with Old National because Old National had historically paid higher dividends than the other financial institution. The committee also noted “the level of interest and commitment demonstrated by Old National,” along with its progress made with due diligence.

CapStar ended talks with the other financial institutions before sending the first draft of the merger agreement to Old National on Oct 11. CapStar also convinced Old National to increase the exchange ratio by 2.8%.

The parties continued to negotiate an agreement with a goal of having it signed before CapStar announced third-quarter earnings on Oct. 26.

CapStar’s board approved the deal on Oct. 25 and it was signed and announced the next day. The deal priced CapStar at 106% of its tangible book value. 

The acquisition “is a tremendous cultural fit and a natural extension of our growth strategy,” Old National CEO Jim Ryan said in a press release announcing the deal. “We can more fully serve our existing Nashville-area clients while also introducing our client- and community-focused brand of banking to the surrounding region.”

The deal should be about 5% accretive to Old National’s 2025 earnings per share. It should take less than two years for the company to earn back an estimated 1.8% dilution to its tangible book value.

Old National expects to incur about $40 million of merger-related expenses. It plans to cut about 40% of CapStar’s annual noninterest expenses.

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