Merger of banks costly at outset
By Deborah Adamson
Advertiser Staff Writer
It will cost nearly $60 million to merge Central Pacific Financial Corp. and the parent of City Bank, but their expected savings over the next two years will be less than half of what they'll spend, Central Pacific said in a filing with the Securities and Exchange Commission yesterday.
Merger-related expenses are expected to total $58.5 million while savings from combining operations would come to $19.5 million — $7.8 million in 2005 and $11.7 million in 2006, the company said.
The largest merger-related expense is $29.5 million in "golden parachutes" to be paid to top executives of CB Bancshares. Transaction costs of $23.6 million, which include investment banking and attorney fees, are the second largest line item.
Also included are $1.875 million in bonuses to entice top executives to stay with the company. Half would be paid when the merger closes, the other half on its first anniversary.
Two investment banks that advised the banks will get hefty payouts. Bear Stearns, which advised Central Pacific, cost $3.65 million while City Bank advisor Sandler O'Neill had a $1.05 million retainer and charged another $350,000 in fees for rendering its opinion about the merger proposal. Sandler O'Neill's fees will rise, the bank said.
These expenses are in addition to the purchase price of City Bank, which was pegged at $395 million in the filing — $306.4 million in stock and $88.6 million in cash.
Bank officials declined to comment beyond the regulatory filing.
Dan Devaney, a partner at Honolulu law firm Cades Schutte LLP which specializes in business law, said the merger is an investment in the banks' future.
"It's going to enhance their ability to compete against other banks," he said. "They may not be able to put a dollar figure on that."
That's what Central Pacific believed from the beginning of its pursuit of City Bank in April 2003. What started out as a year-long hostile takeover attempt punctuated by lawsuits and a public relations war evolved into a friendly agreement at the last hour.
Three months ago, City Bank agreed to be purchased for $20 a share plus 2.6752 shares of Central Pacific for each CB Bancshares share. Shareholders of City Bank will end up owning 42 percent of the combined company, to be called Central Pacific.
The deal, which merges the third and fourth largest commercial banks in Hawai'i, results in total assets of $4.3 billion. The combination would boost Central Pacific earnings by 9 percent in 2005 and 14 percent in 2006, according to Bear Stearns.
Currently, Wall Street analysts expect Central Pacific to earn $2.35 and $2.52 a share in the next two years.
The merger, which is expected to close in the third quarter of this year, awaits regulatory and shareholder approval. According to Hawai'i law, at least 75 percent of voting shares must approve the merger for it to go through.
The Federal Reserve Board and the state Commissioner of Financial Institutions must approve the deal.
City Bank agreed to pay a $12.52 million fee if the merger is terminated under certain conditions.
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
