Significant news struck in the regional banking sector today as PacWest Bancorp (US:PACW) and Banc of California (US:BANC) announced an all-stock merger on Tuesday after markets closed.

PACW stock and BANC stock propelled 31% and 9% higher, respectively, in extended-trading after some volatile movements in prior days. The tie-up will create a Southern California banking giant with more than $38 billion in combined assets and 70 branches, after several likely closures. 

This merger comes after a period of strategic reassessment by PacWest, facing liquidity and capital concerns. Management's efforts to de-leverage the balance sheet through loan and asset sales in recent quarters drove an improvement in its CET1 ratio.

The proposed merger will see PACW stockholders receive 0.8509 share of BANC stock for each share of PACW stock. Following completion, former PACW stockholders are expected to own approximately 47% of the combined company.  The deal is valued at approximately $1.1 billion, when excluding the impact of the additional equity raise. 

Warburg Pincus and Centerbridge Partners, two institutional investors, will purchase approximately 20% of the merged entity by investing $400 million, further solidifying the financial base of the new conglomerate. Both investors will receive warrants to buy additional shares. 

The transaction is expected to close in late 2023 or early 2024, subject to regulatory and shareholder approvals. Once concluded, the company expects to pay down approximately $13 billion in wholesale borrowings, aided by asset sales and excess liquidity.

Jared Wolff, Banc of California president and CEO will retain his role, with John Eggemeyer (independent lead director of PACW) as board chair. 

Unusual Options \Movements

Research using Fintel’s options analysis page for PACW highlights an interesting story from a trader’s perspective so far this month.

The table below shows that investors have been buying into PACW with net long premium being purchased almost every day during the last month. During this period shares rocketed 40% higher before plunging 27% lower shortly after 2.30PM (ET) erasing almost all of the month’s gains.

This curious move, right before the announcement resulted in shares whipsawing well above the closing price in the hour that followed. BANC options data also revealed that $119,000 of net premium was bought during the day as shares rallied into the close before the release, hinting to a possible news leak by insiders.

This consolidation marks a critical milestone in the banking industry following the regional banking crisis earlier this year. The combined strength of Banc of California and PacWest Bancorp will provide an increased scale for the California presence, promising a stronger institution with an expected pro-forma post-deal CET1 ratio exceeding 10%. 

Analyst Weigh In

Piper Sandler analyst Matthew Clark said that he likes the structure of the deal and believes there is low execution risk. The analyst believes that BANC will now have an opportunity to create a more valuable banking franchise amidst the dislocation in California. 

Fintel’s consensus target price valued Pacwest at $12.67 and Banc of California at $16.24, with both averages above current prices. 

This merger between these banking entities and the capital infusion by private equity firms could be the first of several that we see in the coming year. 

This deal represents a forward step in consolidating banking operations in California, and highlights the need for resilience and strength in a challenging banking environment. 

While this deal may symbolize the end of PacWest's independent operations, it opens a new chapter of growth and stability for both entities, ultimately serving the interests of their shareholders, employees, and customers.