This can't be a good sign. After BankAtlantic Bancorp (NYSE: BBX) sold its investment-banking division, Ryan Beck, to Stifel Financial (NYSE: SF), BankAtlantic's stock dropped 4%, while Stifel's shares rose a whopping 14%. In other words, the stock market thinks BankAtlantic got taken for a ride.
Me? I think the stock market's wrong.
Deal or no deal?
In return for Ryan Beck, BankAtlantic gets 2.53 million shares of Stifel (150,000 of which can be substituted for cash), warrants for 500,000 Stifel shares at a $36 strike price, and potential future payments (capped at $40 million over two years, plus a percentage of excess investment banking fees) if Ryan Beck meets financial goals. During negotiations, Stifel's share price was at $36, and 2.53 million shares at $36 works out to $91 million, about equal to Ryan Beck's book value, according to the company press release. In the merger conference call, BankAtlantic's management estimated the total selling price at roughly $123 million.
Competing boutique investment banks that have IPOd within the past couple of years -- including Lazard (NYSE: LAZ), Greenhill (NYSE: GHL), and Evercore Partners (NYSE: EVR) -- have been on an absolute tear, which should've drummed up interest in Ryan Beck. Analysts had pegged Ryan Beck's value at up to $300 million, around three times the going price. However, BankAtlantic struggled to find buyers and had to withdraw a Ryan Beck IPO, presumably because of lack of interest. Book value is often considered a proxy for liquidation value. Thus, because Ryan Beck was unprofitable, BankAtlantic's management was willing to sell it at a pretty disappointing valuation to get rid of its red ink.
The deal seems like a good one for Stifel, which gets the benefit of scale -- growing from 700 financial consultants to 1,100, and $450 million in sales to $670 million -- and complementary geography in the two firms' locations. Stifel's management noted that if one adds in the potential earn-out payments, the company paid roughly 1.4 times book value and 0.6 times revenue, in contrast to Stifel's current trading multiples of 2.1 times book (at the time of the conference call) and more than 1 times revenue.
Selling Ryan Beck at such a low multiple of book value was a bitter pill for BankAtlantic shareholders to swallow. Their silver lining? The recent rise in Stifel's stock immediately adds about $20 million to the purchase price -- an admittedly small consolation.
What the dealio?
In light of the massive criticism of the low selling price, why did BankAtlantic sell? In the conference call, BankAtlantic's management noted that Stifel was the best fit (shockingly, management actually seemed concerned about Ryan Beck's customers and employees, rather than just the selling price -- blasphemy!), and said that by selling for stock, BankAtlantic would capture any future upside.
In my humble opinion, I believe the selloff in BankAtlantic's stock has resulted more from investors' disappointment because of unreasonably high expectations, rather than BankAtlantic getting rooked as the stock market seems to believe. Selling an unprofitable division at 1.4 times book value (and even higher, given the run-up in Stifel's stock price) isn't exactly a home run, but it's not that bad, either. In fact, selling at the proposed $300 million price, or 3 times book value, would be highway robbery. If Stifel's stock does well over the next couple of years, and BankAtlantic hangs on for the ride, the deal could turn out quite satisfactorily. In light of that, I'll be taking a look at BankAtlantic's stock in the coming weeks.
Bank on further Foolishness:
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. The Motley Fool has a disclosure policy. Emil appreciates comments, concerns, and complaints.
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