Regulatory Delay May Pay Off for Private Equity in ECB Deal

Private-equity firms complain about the government dragging its feet in approving their bank deals, but the investors in ECB Bancorp Inc. may have found a silver lining.

The $942 million-asset company in Engelhard, N.C., announced late Wednesday that its plan to raise $80 million from six private-equity firms had been terminated because one of the investors had yet to get regulatory clearance to invest. ECB could still hammer out a new deal with the same groups.

"All six investors have agreed to continue to negotiate a new securities agreement," A. Dwight Utz, the chief executive of ECB, said in a short interview Thursday. "There is a possibility the price could change, the terms could change and the board may or may not agree to those changes."

ECB began its private-equity discussions in 2010, Utz said. Of the $80 million, $20 million would go toward cashing out the company's shares issued to the Treasury Department for the Troubled Asset Relief Program. The remainder would be used to fuel growth, including acquisitions.

Brady Gailey, an analyst at KBW Inc.'s Keefe, Bruyette & Woods, said he thinks the deal will happen. That's not to say he applauds it. "I'm a fan of this company and of this management team, but I just think that raising $80 million at a deep discount to tangible book doesn't make sense to legacy shareholders," Gailey said. The North Carolina landscape is competitive, and the company should raise funds as needed, he said. "Everybody knows this deal is going to be renegotiated, and the dilution will just be more."

At $16 per share, the initial agreement would have sold 69% of the company at 63% of tangible book value. If the investors renegotiate the deal at its current stock price of $10 per share, they would get 74% of ECB at 43% of tangible book value.

Though the regulatory snag gives the investors a chance to bargain, government skepticism of private equity is real. Regulators worry that such investors will rush to flip banks for a profit and inject excessive risk into banking. As the economy has slowly improved, regulators have tightened their scrutiny, observers say.

"There has been an evolution toward a more restrictive and more invasive process and that can blow up a transaction," said J. Brennan Ryan, a partner at Nelson Mullins. "I do think the improvement in the market has had an impact. Before, there was a willingness to get creative in the interest of protecting the industry. There are some deals that were done in 2009 that would be very difficult to get done today, if not impossible."

Officials at the Federal Deposit Insurance Corp. and Federal Reserve Board did not comment.

The planned investment was led by Pacific Investment Management Co., Patriot Financial Partners and Endicott Management. Utz declined to say which investor was having problems getting approval. Calls to those three firms were not returned. Some observers speculated that it could have been Pimco, because the ECB investment would be the bond magnate's first since creating a fund to invest in undervalued banks. Ryan said it's tough to say where the hang-up lies.

"Being cleared in prior deals does not mean you're cleared for other deals," Ryan said. "But with first-time investors, there can be surprises when the Federal Reserve does its analysis."

Jon C. Bruss, chief executive and managing partner at Fortress Partners Capital Management Ltd., a private-equity firm based in Hartland, Wisc., said that the process of getting approval to invest in a bank is particularly thorough.

"We've been through the drill a couple of times in the last two years," Bruss said. "When the Fed starts digging around in the list of things you're involved in, they drill down pretty far. We are still investing, but it does create a disincentive."