Amid the wreckage of the banking sector caused by the year-long credit crunch, one mid-size California player feels confident enough in its standing to reject a takeover offer.
traded modestly higher on Thursday, one day after the San Francisco-bank told shareholders to reject a $3 billion, or $63 a share, tender offer by its majority stakeholder,
The Bank of Tokyo-Mitsubishi UFJ
, a wholly-owned subsidiary of
Mitsubishi UFJ Financial Group
. The Japanese bank currently holds a 65% stake in UnionBanCal.
Analysts say the market expects the bid to move higher. The $63 a share price represents an 8.3% premium to Monday's closing share price of UnionBanCal -- the day before the offer was proposed. Shares were up 21 cents to $65.21 on Wednesday afternoon.
"We do not believe this is the end of the dance," writes Lana Chan, an analyst at BMO Capital Markets. Mitsubishi UFJ "has the ability to do
raise its offer given that the $3 billion offer is only roughly 3% of
its market capitalization and given that UnionBanCal would likely be used as a launch-pad for potential future acquisitions in the U.S. for the large Japanese bank."
Analysts say the bid could rise to between $65 a share to $70 a share.
UnionBanCal says the offer "substantially undervalues" the company. The San Francisco-based bank cited its strong capital position, "superior" credit quality despite a poor banking environment, particularly in its home state. It also said that the Japanese bank was taking advantage of the negative sentiment in the banking industry these days to submit a low offer.
"The proposed price does not reflect the strength of UnionBanCal's strong capital position, the superior credit quality of its assets, and its potential for profitable asset and core deposit growth in the current market environment," Richard Farman, UnionBanCal's lead director and head of the special committee reviewing the offer, said in a release Wednesday.
The company added that the proposed offer was made at a time of "negative sentiment and uncertain outlook" in the banking sector and that "any valuation of UnionBanCal should not be inappropriately impacted by these negative factors."
"We agree with
UnionBanCal's perspective that it does not make sense to sell at a point of weakness for the industry if they are a long-term survivor and bank multiples eventually revert to the median, but
Mitsubishi UFJ's majority ownership stake takes this out of
UnionBanCal's hands to some degree," Brent Christ, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller, writes in a note. The $63 a share offer represents 1.8 times book value, 2 times tangible book value and 13.9% core deposit premium, he estimates.
"I think it should be a little bit more," Christ says in an interview.
UnionBanCal "certainly has, relative to a lot of the other California banks, weathered the storm. I think that
the Bank of Tokyo sees that and sees where the valuations are
at other banks and wants to expand their presence in the U.S. a bit. This would be a good platform to do that," Christ says.
He estimates that a $70 a share offer represents two times book value, 2.1 times tangible book value and 17% core deposit premium -- more appropriate measures given the bank's strong core deposit base, positive earnings momentum and favorable risk profile, he says.
UnionBanCal has $60.5 billion in assets and 337 branches along the West Coast. It holds the sixth largest deposit market share in the state of California, according to BMO Capital Markets.
Through its conservative lending standards, UnionBanCal has been able to avoid many of the problems associated with residential mortgages and construction loans that other mortgage-heavy banks in California like
have struggled with, analysts say.
WaMu, technically headquartered in Seattle, resorted to a $7.2 billion capital infusion led by TPG and other large institutional investors this spring. Countrywide Financial was acquired by
Bank of America
in early July, while just a week later IndyMac was seized by regulators after it was no longer considered well-capitalized.
At the end of the second quarter, nonperforming assets to total assets were 0.37% last quarter, while net charge-offs totaled 0.28% to average loans. UnionBanCal's Tier-1 capital level was at 7.96%, according to its Web site.
The Bank of Tokyo-Mitsubishi UFJ has owned a majority stake in UnionBanCal since 1996, according to its own press release regarding the offer. It says the decision to acquire the remaining outstanding shares is a "first step of our growth strategies in the United States, and we will achieve greater management flexibility and aim to further strengthen our presence in the United States."
The tender offer this week was Mitsubishi's second try at buying its remaining stake in UnionBanCal. The company proposed in April to buy the shares at $58 a share, which was rejected at the time.
UnionBanCal hasn't been totally immune to the credit cycle and California housing market. Net income fell 14% last quarter to $141 million, or $1.02 a share. It took a $95 million provision in the quarter up 32% from the first quarter.
But at least one analyst says the bidding war that UnionBanCal has commenced is "a waste of time and money."
Ever-opinionated Richard Bove of Ladenburg Thalmann writes in a note that UnionBanCal "may have a point" when it argues that the Japanese bank should increase its offer given that "this stock may be worth well more than $63 per share in time." But it is "difficult to argue that it is worth much more than that at present."
The offer is "well above" valuations placed on other banks, he adds. "It is hard to argue the justification as to why Mitsubishi should pay more. Moreover, it is hard to understand why Mitsubishi should argue the point. It can call a meeting of the board and remove the special committee. It has 65% of the votes. It can accept its own bid for the same reason."
"Thus while an interesting battle may ensue, there is no likelihood of Mitsubishi losing," Bove says. "I suggest taking the profit from this offer now and going elsewhere."