State Bank Financial in Atlanta tried to sell itself to several regional banks before working out a deal with Cadence Bancorp. in Houston.
The board of the $5 billion-asset State Bank received letters of intent in early April from Cadence and an unnamed regional, according to
State Bank’s strategic committee also ended up working with three investment banks.
The $11 billion-asset Cadence was able to secure the $1.4 billion deal by offering a hefty premium and assuring State Bank in early May that it was “ready to immediately approve and execute the merger agreement,” the filing said.
The merger, which is one of the biggest bank deals announced this year, shows how much work can go into making a large transaction happen.
It also shows patience on the part of State Bank and Cadence, which first discussed a merger in March 2014. At that time, State Bank was selling payroll services to Cadence customers under a referral agreement.
The companies got as close as entering into a confidentiality agreement in mid-2015. Talks that resumed early last year were put on hold when Cadence instead decided to move forward with an initial public offering.
State Bank last year discussed selling with a number of banks. State Bank, a serial acquirer with aging management, was also interviewing potential successors for Chairman Joseph Evans and CEO Thomas Wiley, the filing said. Evans was 68 when State Bank filed is proxy statement in March; Wiley was 65.
Evans and Wiley spent much of 2017 talking to potential buyers, including a “substantially larger regional bank” that informed State Bank in October that it wasn’t in a position to pursue a merger and a large regional that made it clear earlier this year that it had no interest in a deal.
It was widely known inside the company that State Bank was seeking a buyer, Paul Murphy, Cadence’s chairman and CEO, said in an interview after the deal was announced.
"State Bank's leadership was very forthcoming in talking to their bankers," Murphy said, adding that such openness should help Cadence retain employees. “This deal wasn't at all a surprise because of their transparency. … Their credibility with their staff is really high.”
Despite the initial setback, Evans and Wiley kept scheduling meetings. By August, Wiley had found two Southeastern regionals that were interested in a deal. State Bank contacted three other banks, including Cadence, but none of the institutions indicated enough interest, the filing said.
State Bank last fall held “high-level strategic” discussions with the unnamed regionals, going as far as providing each with access to due diligence materials. In October, State Bank’s board formed a strategic committee, consisting of Wiley and three independent directors, to oversee the process.
The results from those talks must have been sobering.
One of the banks submitted a letter of intent on Nov. 7, only to rescind it about a week later after its stock price fell. The other bank offered a price range that represented a discount to State Bank’s stock price on the low end and a narrow premium at the high end, prompting an end to talks.
The new year offered renewed opportunity for State Bank.
A late-February meeting between executives at State Bank and Cadence rekindled conversations. That spurred State Bank to contact the regional bank that had made the low-premium offer.
The unnamed bank indicated on March 13 that it was considering an all-stock offer of $1.29 billion to $1.32 billion, based on State Bank’s shares outstanding on March 31, or a premium of 10.7% to 13.3% to State Bank’s stock price at that time.
Cadence on March 28 pitched an all-stock offer of $1.2 billion, or a 3% premium.
By early April, Cadence and the unnamed bank had provided State Bank with nonbinding letters of intent that each included a maximum valuation of $1.25 billion, or a premium as high as 5.9%.
Cadence wanted to “complete accelerated due diligence and expeditiously negotiate” a deal; the other bank said it would need four to six weeks to evaluate State Bank.
State Bank told both institutions that it was unwilling to grant exclusivity, which opened up the possibility of executing both letters of intent and pursuing parallel negotiations. Its legal counsel gave Cadence and the other bank with a draft version of the merger agreement to begin more in-depth conversations.
The banks were given a May 8 deadline to submit their final bids.
In the days leading up to the deadline, Evans and Wiley told the leaders of the two banks that they needed to “bid competitively” if they wanted to walk away with the deal, the filing said. At the same time, State Bank’s legal counsel took steps to keep the draft merger agreements “substantially similar.”
Cadence’s final bid of about $1.36 billion had an 11.7% premium, a willingness to move quickly and a promise to move its bank’s headquarters from Birmingham, Ala., to Atlanta. The other bank, which offered roughly $1.32 billion, or an 8.3% premium, needed more time because it had not completed its due diligence.
For those reasons, State Bank’s board decided to move forward with Cadence. Each board approved the deal, which was announced on May 13. The deal, which is expected to close in the fourth quarter, priced State Bank at 250% of its tangible book value.
"We went over this bank with a fine-tooth comb, and the more we checked, the better it looked," Murphy said. "They've got such a good franchise and they've operated it so well. It's a clean shop."
Cadence expects the deal to be 6% accretive to next year’s earnings per share and 7% accretive in 2020, excluding $58 million in one-time charges. It should take less than three years to earn back the expected 4% dilution to Cadence’s tangible book value.
Cadence plans to cut about 30% of State Bank’s annual noninterest expense.
Raymond James and Sandler O’Neill, which advised State Bank, will each receive $6.1 million for their work on the deal. Goldman Sachs, which represented Cadence, will receive $6 million. The filing did not disclose compensation for FIG Partners, which provided a fairness opinion for State Bank’s board.
Evans, Wiley, and Kim Childers, State Bank’s vice chairman and executive risk officer, agreed to one-year employment agreements with Cadence; each will receive a $100,000 consulting fee.
Evans and Wiley each owned 1.1% stakes in State Bank when it filed its proxy statement.
Wiley, who will chair Cadence Bank, will receive a lump sum payment of $2.4 million when the deal closes. Childers will be paid $1.8 million, while Evans, who will become Cadence’s vice chairman, will get $700,000. Wiley and Childers will be eligible for a prorated bonus for 2018.
John Reosti contributed to this article.
