Acquirer MidSouth Prices Stability into a Volatile Market

MidSouth Bancorp Inc. in Lafayette, La., found a way to build in some protection against topsy-turvy markets in its most recent acquisition.

The $1.1 billion-asset company agreed this week to buy the assets and deposits of First Louisiana National Bank in Breaux Bridge, La. The deal had two interesting safeguards for MidSouth that other would-be acquirers should observe.

First, the deal calls for shareholders of First Bankshares of St. Martin Ltd., First Louisiana's parent company, to receive $11.5 million in cash and 725,000 shares. It is uncommon to have the ultimate number of shares determined in advance; typically the number is decided just before closing, using the previously agreed upon exchange ratio and adjustments tied to trading in the final days before the deal is sealed.

Also, MidSouth is buying First Louisiana's assets and deposits, rather than the entire bank or its holding company, in a deal that is expected to close during the fourth quarter.

Rusty Cloutier, MidSouth's president and chief executive, said in an interview Thursday that the companies originally planned to take a traditional route for pricing the transaction. However, last month's market disruption caused by the debt ceiling debate in Washington and Standard & Poor's subsequent downgrade of U.S. debt led the parties to renegotiate and develop a more innovative structure.

As a result, the banks decided to add more cash to the deal and agreed on a predetermined number of shares.

"That stops us from having to watch the market every day," Cloutier said. "We are no longer at the whim of the market. President Obama is addressing Congress next week and if the next morning the market goes in the tank or if it goes up, it doesn't matter."

Dan Bass, a managing partner at FBR Capital Markets, said he sees the valor in agreeing to a specific number of shares, though he added that market fluctuations tend be less disruptive than Cloutier might expect.

"This kind of structure definitely puts more assurance on both sides, and it allows the buyer to appropriately measure dilution," Bass said. "But theoretically, if the two banks are in the same area, they should go up and down accordingly."

Bass said the seller must also believe there is upside potential in the buyer.

James Fontenot, the president and chief executive at the $155 million-asset First Louisiana, agreed.

"We know that the price will continue to go up in the long term," he said in an interview Wednesday.

MidSouth's agreement to purchase just the seller's assets and deposits is becoming increasingly popular, particularly in situations where the seller has a high level of nonperforming assets. In those instances, the buyer chooses to take the good parts of the bank, while the seller retains the dregs. First Louisiana, however, is not troubled; at June 30, nonperforming assets made up less than 1% of total assets.

Still, Cloutier said the purchase-and-assumption route has much more favorable accounting treatment than that of a traditional acquisition.

"There is some better treatment of things like goodwill," he said. "I think we could start to see more deals structured like this."