Note: this is an extremely illiquid situation. I purchased a few hundred shares over the week following the announcement, but have been unable to acquire any more at a price I consider safe. Therefore, this may not be an overly actionable idea, but is still interesting nonetheless.
Friends Bank (FRIE) is an OTC listed, regional bank, based in Florida. It is also a “dark company” which means it no longer reports its results with the SEC – making it very difficult to analyse.
Why am I interested?
On the 20th February, they announced a very peculiar transaction: FAIRWINDS Credit Union, another Florida based bank, announced they were acquiring FRIE, but did not disclose a price. I’ve been tracking risk arbitrage opportunities for a long time, but this is the first transaction I have come across that didn’t reveal a price. Combined with the stock being “dark” and therefore, difficult to analyse, my attention was well and truly grabbed.
What could it be worth?
I managed to acquire a few shares in what is probably the most illiquid issue I’ve ever attempted to acquire, and reached out to the board to try and get a copy of the latest annual report. Unfortunately, I’m yet to hear back from them…
I did however, manage to find some financials reported to the Federal Financial Institutions Examination Council which I found via the Capital IQ platform (see screen shots below)
The key numbers being:
Per OTC Markets the last reported number of shares outstanding (as at 12/31/2010) was 1,183,247 – giving us a per share, book value of ~$8.70 ($10m / 1.18m). The share count is the biggest risk in this investment as I have not been able to verify the number. Looking through the accounts since 2010, the company was slightly loss making in 2011 & 12, but the balance sheet looked to absorb it. However, I cannot guarantee that they did not issue shares during this period.
Historically, M&A transactions in the regional bank sector have occured at prices >1X tangible book value:
Even adjusting for the tiny size of FRIE, a multiple of ~1.2X book value seems reasonable. Especially because FRIE is generating a decent 1% ROA and has been consistently growing for the last 5+ years.
Putting it all together
We have a bank currently under a takeover offer, with an unknown price. It has a book value of $8.70 and precedent transactions have occured in the range of 1.2-1.5X. Now here is the interesting part, I was able to acquire my stake for an average price of $7.60 – or <0.90X book value!
Due to the uncertainty around this deal, I obviously couldn’t make this a large bet. However, I think it is extremely unlikely that the deal has been priced at <1X book value, giving me a decent margin of safety. I also think the potential upside well and truly offsets the “uncertainty risk” with potential profits of 35-70%.Most importantly, I believe it is highly unlikely that the market is pricing the stock efficiently, given the access to information is difficult, the liquidity non-existent and the upside highly uncertain.
Overall, I think this is an attractive situation, hidden way off the beaten path. With the deal expected to close in Q3 2019, even a 1X multiple would be a highly attractive IRR. The downside on a “deal break” is probably ~$5.60 (or 25%) which would be a very cheap price for a decent little bank. Given the consolidation that has occurred in this industry over the years, I put the probability of a deal of this size breaking due to regulatory interference very low.
As always, this is not financial advice. Do your own research. Do not rely on any numbers or logic I present – they could all be inaccurate or flawed.