Bank launches hostile bid
By John Duchemin
Advertiser Staff Writer
In a hostile takeover attempt, Central Pacific Bank yesterday announced plans to buy rival City Bank in a move that would create a stronger competitor to the state's largest banks and cost some employees their jobs.
CPB Inc., the parent of Central Pacific, is offering $285 million for the stock of City Bank parent CB Bancshares Inc., according to filings today with the Securities and Exchange Commission. The offer comes to $70 per City Bank share, a premium of 51 percent over yesterday's closing price of $46.38.
"I wouldn't classify this as a hostile deal," said Central Pacific Chairman Clint Arnoldus. "It's a proposal that's going to give shareholders a 54 percent premium.
"It's downright friendly."
City Bank executives declined to comment.
The sale would change the landscape of Hawai'i banking, creating a rival to the state's three dominant financial institutions — First Hawaiian Bank, Bank of Hawaii and American Savings Bank — in a pattern of consolidation more apparent on the Mainland in the last 15 years.
The combined bank would control about 15 percent of the market as measured by deposits, according to statistics provided by Central Pacific. In all, about 90 percent of Hawai'i's banking activity would be concentrated in four relatively large banks, the balance going to a cluster of smaller savings and loans and credit unions.
Customers of both City Bank and Central Pacific likely would see some branches disappear, since both concentrate on the local residential and small-business markets and frequently place branches in the same neighborhoods.
Central Pacific said it would try to trim branches and employees to eliminate overlaps, using the money saved to expand service to rural and Neighbor Island areas.
To get to that stage, however, the takeover bid must pass several hurdles, the most significant being approval by City Bank directors.
Central Pacific said the banks had been negotiating a possible merger for about a month, but City Bank executives had rejected their offers, prompting Central Pacific to take its bid public in an attempt to win approval from a majority of CB Bancshares shareholders over any objections from the directors.
A struggle will follow for control of the bank's stock as Central Pacific tries to rally City Bank shareholders to its cause. Since Feb. 25, Central Pacific has bought 88,000 shares of CB Bancshares — about 2.2 percent of the total — and secured the support of CB's largest shareholder, Netherlands-based investment firm TON Finance, which controls 8.9 percent of the company's shares.
"The offer is an extremely attractive proposition for (CB Bancshares) shareholders," said Joro Shirai, director of TON Finance.
Central Pacific has yet to secure votes from the other 88 percent of shareholders. City Bank managers and directors own about 6 percent of the stock, while the company's employee stock ownership plan owns another 6 percent. The rest is controlled by individual and institutional investors, many of whom are prominent in local business. None owns more than 6 percent.
City Bank management rejected an initial offer March 17, according to Central Pacific. The two parties met on April 2 but came to no agreement, Central Pacific said.
Most City Bank directors and top executives did not return phone calls requesting comment, or had no comment yesterday.
The takeover bid would give Central Pacific a 62 percent share of the combined company, leaving CB Bancshares owners with 38 percent. City Bank was offered three seats on the combined board of directors, Arnoldus said. The other directors would be offered positions on a noncontrolling community advisory board, Arnoldus said.
If the merger is approved, the combined bank would have total assets of $3.7 billion, deposits of $2.8 billion and a stock market capitalization of $600 million.
Central Pacific is Hawai'i's fourth-largest banking company, with 500 employees, 24 branches and $2.03 billion in assets. The 21-branch City Bank, also with 500 employees, is No. 5, with $1.67 billion in assets.
Central Pacific has been growing steadily in recent years, especially since the arrival of Arnoldus in mid-2002. In the last year, the bank has moved aggressively to increase its visibility and change its image from a small-scale neighborhood bank catering primarily to Japanese Americans to a big-league financial institution that can compete with traditional business-banking and private portfolio leaders First Hawaiian and Bank of Hawaii.
The new bank would be smaller than the top three banks. Bank of Hawaii and First Hawaiian each have about 30 percent of deposits in the state, and American Savings Bank has about 20 percent. But Central Pacific said the merger would better position the bank to compete.
The combined bank would have better economies of scale, with expanded business banking and wealth management services, a larger branch and ATM network and larger lending limits, Central Pacific said.
The company expects a one-time, $32 million charge to earnings related to the transaction costs. It estimates the merger would add 10 percent to earnings in 2004.
Central Pacific was founded in 1954 by a group of local Japanese Americans, and developed a strong relationship with the Japanese bank Sumitomo, which once controlled a substantial portion of stock and picked many of the bank's executives.
Sumitomo gradually reduced its role, and Central Pacific restructured its operations beginning in 1999 under the leadership of former CPB president Joichi Saito. Since then, the bank's earnings have improved steadily and its stock price has doubled.
Saito retired last year and was replaced by Arnoldus, of California.
CB Bancshares in its current form was created by the 1993 merger of City Bank and International Savings & Loan. Key directors and stockholders include members of the Tokioka family, longtime members of the Hawai'i financial and insurance community.
Stock in CPB Inc. closed at $25.30 yesterday.
