Banc of California, PacWest Bancorp to merge in all-stock deal

Santa Ana, Calif.-based Banc of California Inc., the parent company of Banc of California NA, and Beverly Hills, Calif.-based PacWest Bancorp, the parent company of Pacific Western Bank, will merge in an all-stock deal.

PacWest will merge into Banc of California, and Banc of California NA will merge into Pacific Western Bank. The combined holding company and bank will operate under the Banc of California name and brand following closing of the transaction.

Under the terms of the deal, Banc of California will be the legal acquirer, while PacWest will be the accounting acquirer, with fair value accounting applied to Banc of California's balance sheet at closing.

PacWest stockholders will receive 0.6569 of a share of Banc of California common stock for each PacWest common share. Each outstanding share of PacWest's 7.75% series A fixed-rate reset noncumulative perpetual preferred stock will be converted into the right to receive 1 share of a newly created series of substantially identical preferred stock of Banc of California with the same terms and conditions.

Upon completion of the proposed transaction, the shares issued to PacWest stockholders in the merger are expected to represent about 47% of the outstanding shares of the combined company, and the shares issued to the investors in the equity capital raise transaction are expected to represent approximately 19% of the outstanding shares of the combined company. Banc of California common shares outstanding immediately before the completion of the merger are expected to represent about 34% of the outstanding shares of the combined company.

Banc of California also entered into investment agreements with affiliates of funds managed by Warburg Pincus LLC and certain investment vehicles, managed or advised by Centerbridge Partners LP and its affiliates, which will invest a total of $400 million for newly issued equity securities concurrently with and subject to closing of the merger.

In the equity capital raise transaction, Banc of California will sell about 21.8 million common shares at a purchase price of $12.30 per share and 10.8 million shares of a new class of its nonvoting, common-equivalent stock at a purchase price of $12.30 per share.

Additionally, the affiliates of funds managed by Warburg Pincus will receive warrants to purchase about 15.9 million of Banc of California nonvoting, common-equivalent shares, and certain investment vehicles, managed or advised by Centerbridge and its affiliates, will receive warrants to purchase about 3.0 million Banc of California common shares, each with an exercise price of about $15.375 per share, a 25% premium to the price paid on common stock. The warrants carry a term of seven years but are subject to mandatory exercise when the market price reaches $24.60 over a specified period, a 100% premium to the price paid on common stock.

The proceeds from the capital raise are expected to be used in conjunction with other planned actions to reposition the combined company's balance sheet and generate material savings. The combined company will repay about $13 billion in wholesale borrowings, funded by sales of assets that are fully marked as a result of the transaction, and excess cash.

Banc of California NA entered into a $3.5 billion interest rate swap and a contingent forward asset sale agreement to hedge interest rate risk and lock in proceeds.

The repositioning transactions for the combined company will lead to a higher net interest margin, estimated to add over 170 basis points versus the pre-restructured balance sheet. The actions result in a common equity Tier 1 capital ratio of more than 10% pro forma, including the cost of swaps purchased and forward sales.

At the announcement, S&P Global Market Intelligence calculates the deal value to be 51.02% of common equity, 51.69% of tangible common equity, 3.65% of deposits and 2.66% of assets.

Market Intelligence valuations for bank and thrift targets in the West region between July 25, 2022, and July 25, 2023, averaged 117.77% of book and 119.73% of tangible book and had a median of 8.22x last-12-months (LTM) earnings, on an aggregate basis, and averaged 95.81% of book and 96.04% of tangible book and had a median of 7.75x LTM earnings, on a per-share basis.

Based on Market Intelligence data, upon completion, Banc of California will expand in California by 68 branches to be ranked with a 1.34% share of approximately $2.21 trillion in total market deposits and will enter North Carolina with one branch to be ranked fifth with a 2.21% share of approximately $545.25 billion in total market deposits and will enter Colorado with one branch to be ranked No. 70 with a 0.1% share of approximately $205.28 billion in total market deposits.

The merger is expected to close in late 2023 or early 2024, and the equity capital raise is expected to close concurrently with the merger.

Following closing and the asset sales, the combined entity will have about $36.1 billion in assets, $25.3 billion in total loans, $30.5 billion in total deposits and over 70 branches in California, according to a news release. The combined bank will be headquartered in Los Angeles.

Banc of California President and CEO Jared Wolff will retain the same roles at the combined company. John Eggemeyer, independent lead director on the board of PacWest, will become the chairman of the board of the combined company.

The board of directors of the combined company will consist of 12 directors: eight from the existing Banc of California board, three from the existing PacWest board and Todd Schell from Warburg Pincus.

The financial benefits of the transaction include estimated 2024 earnings per share and tangible book value accretion of over 20% and about 3%, respectively, according to the news release.

J.P. Morgan Securities LLC is financial adviser and rendered a fairness opinion to the board of Banc of California and is acting as the sole placement agent to the company. Skadden Arps Slate Meagher & Flom LLP is legal counsel to Banc of California.

Piper Sandler & Co. is financial adviser to and rendered a fairness opinion to the board of PacWest. Sullivan & Cromwell LLP is serving as legal counsel to PacWest.

Jefferies LLC is financial adviser to Warburg Pincus and Centerbridge. Wachtell Lipton Rosen & Katz is legal counsel to Warburg Pincus, and Simpson Thacher & Bartlett LLP is serving as legal counsel to Centerbridge.

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