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Mississippi bank growing through 'small ball' M&A, and analysts like it

BancorpSouth Bank's strategy of acquiring small banks to add significant assets over time appeals to analysts, as these smaller transactions often carry less risk, and a lack of competition can create better pricing for buyers.

The Tupelo, Miss.-based bank announced March 5 that it is buying Panama City, Fla.-based Summit Financial Enterprises Inc. and Van Alstyne, Texas-based Van Alstyne Financial Corp. The deals include about $850 million in assets, or 4% to 5% of BancorpSouth's size.

"While small, I think these look like decent deals," said FIG Partners analyst John Rodis. "They can collectively put together multiple deals like this, and over time it can have a bigger impact."

This approach can have other benefits, too. "Even though you've got to do all the work that you would a bigger deal ... the risk involved in [smaller deals] is probably a little bit less," said Rodis.

"A lot of times there's less competition for these deals, and as a result, the pricing can be better in a lot of situations," he added.

Keefe Bruyette & Woods analyst Catherine Mealor took a similarly positive view of the deals. "We like [BancorpSouth's] 'small ball' strategy," she wrote, noting that the acquisitions boost BancorpSouth's footprint in Texas and the Florida Panhandle while adding minimal tangible book value dilution or execution risk.

Investors had a less favorable immediate reaction. BancorpSouth’s stock was down 3.9% on March 6, the day after the deals were announced, to $30.65 per share. The SNL U.S. Bank and Thrift index was down 1.1% the same day.

This is the second time BancorpSouth has done simultaneous deals recently. On Nov. 13, 2018, the bank announced plans to acquire Jackson, Ala.-based Merchants Trust Inc. and Dallas-based Casey Bancorp Inc. Merchants Trust had $219.4 million of total consolidated assets at year-end 2018, and Casey had $344.3 million, also on a consolidated basis.

The bank could continue this string of smaller acquisitions. "Due to the relatively small size of the currently pending four transactions, we believe we have the capacity to integrate these banks while continuing to be active in discussions with other small or larger institutions," BancorpSouth CEO Dan Rollins wrote in an email.

"You'll see [CEO Dan Rollins] trying to do future deals," said Daniel Bass, Managing Director at Performance Trust Capital Partners LLC. "He's still trying to get big in Texas ... and the growth prospects of the Texas market are better than the home market."

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All the pending BancorpSouth acquisitions include a somewhat unique 'cap-and-collar' pricing structure that puts upper and lower limits on the deal value, keeping the price within a specified range even if stock prices change drastically for the buyer or seller. A best-efforts analysis by S&P Global Market Intelligence found just 20 deals announced since Aug. 1, 2017, that specified a cap-and-collar structure. BancorpSouth is the buyer in four of those deals.

The recent volatility in bank stock prices may be the reason behind collars, according to Rodis. Bank stocks tumbled in the fourth quarter of 2018; the SNL U.S. Bank and Thrift index fell 14.4% from July 31, 2017, through Dec. 24, 2018.

"I think [adding collars is] just a function of where we've been and the volatility in the sector," Rodis said in an interview. "It's probably just the prudent thing to do."

Bass said he expects the volatility will encourage more banks to add collars to deals.

"[Collars are] not just a one-way," the investment banker said. "They're trying to make it fair from both sides, so it's harder for the deal to break up." Bass said if one bank's valuation changes because of something unique to that bank, the collar would allow for the deal to be reexamined or "cured." Curing the deal would involve changing the amount of shares exchanged in order to bring the price back into the specified range.

As for any issues specific to the buyer, BancorpSouth closed its 2018 deal with Houston-based Icon Capital Corp. in less than six months, but the bank's earlier deals with Temple, Texas-based Central Community Corp. and Monroe, La.-based Ouachita Bancshares Corp. each took over four years to close.

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