Territorial in Hawaii rebuffs offer, doubles down on sale to LA bank

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Territorial Bancorp in Honolulu has rejected an unsolicited offer from a group led by Blue Hill Advisors and said it would follow through with its planned sale to Hope Bancorp in Los Angeles.

The $17.4 billion-asset Hope and the $2.2 billion-asset Territorial agreed in April to an all-stock deal valued at $78.6 million. Hope said its offer priced Territorial at $8.82 per share, though the actual value would be determined upon closing. The deal is expected to close by Dec. 31.

However, in late August, an investor group led by Blue Hill and including former Bank of Hawaii CEO Allan Landon made a competing offer. It valued Territorial at $12 per share and promised local leadership of the bank in Hawaii.

"We think our proposal is significantly better for Territorial's shareholders and other constituents," Landon said in a statement this week. "If given the opportunity, we are prepared to move quickly and would expect to close our investment by year end."

But it's complicated.

The investor group named Landon and Blue Hill among its members — but it left unclear if there were other local investors. It would buy at least 70% of Territorial through a process that involved the group buying convertible preferred stock, then enabling Territorial to use the proceeds to commence a tender offer at $12 a share.

If investors were unable to tender at least 70% of Territorial's stock, however, the deal would fall through, and the company would have to return the proceeds. Territorial also said it would have to pay Hope a $3 million termination fee to pursue the investor group's offer. The seller further noted that its deal with Hope prevented it from entertaining competing offers that were not clearly superior.

The offer from Blue Hill "claims to provide a nominally higher purchase price, but there are significant factors making the proposal highly uncertain and inferior to the merger agreed upon with Hope," Territorial Chairman and CEO Allan Kitagawa said in the release Thursday, rejecting the offer.

Territorial said the Blue Hill offer "was found to contain multiple flaws." The bank said it was made on behalf of a group of "largely unidentified investors who provided no evidence that they possessed the financial means to back up their offer" or that they could "secure the required regulatory approvals promptly, if at all."

In contrast, "a detailed due diligence review has already been completed and only a minimal number of remaining conditions are needed to complete the Hope merger," Territorial said.

Blue Hill said Territorial's board twice rejected its proposal, on Sept. 6 and Sept. 12. Blue Hill is now encouraging Territorial shareholders to oppose the Hope deal, a development that could open the door for the competing offer. Blue Hill also this week named another member of its investor group, O'Brien-Staley Partners in Minnesota.

The Federal Reserve this week cut its benchmark interest rate by a half point and signaled further reductions were in the cards in coming months. The shift in monetary policy is expected to lower costs for borrowers, ward off loan losses and gradually push deposit costs lower for banks. "Territorial's shares are significantly undervalued and poised to recover" as lower rates "alleviate funding pressures and buoy asset values," Landon said.

Jason Blumberg, managing member of Blue Hill, said Territorial's "shares have considerable upside from here." Its stock hovered around $10 in recent sessions, but it was down about 7% year-to-date through Thursday. Bank stocks overall are up this year.

"We are providing a substantial premium in cash and offering a meaningful percentage of existing shareholders the option to participate in the bank's recovery if they choose to," Blumberg said. "The merger with Hope substantially dilutes the value of any recovery in Territorial. Shareholders who want to own Hope stock can take our cash and buy more shares than they would have received in the merger."

Blue Hill said its proposal is "supported by leading financials-focused investment funds with indicative commitments that exceed the capital required to consummate the transaction. The investors are prepared to make the required bank regulatory applications related to their respective investments. No other regulatory approvals are expected to be required."