Why PacWest Bancorp Stock Just Exploded 25% Higher

What happened

Regional bank PacWest Bancorp (PACW) reported its second-quarter results Tuesday after the bell, with adjusted profits coming in 10% ahead of expectations at $0.22 per share. That wasn't, however, the main reason why PacWest shares soared Wednesday, up by 25.3% as of 2:05 p.m. ET.  

The reason why that happened is simple: Also on Tuesday evening, Banc of California (BANC) revealed that it is buying PacWest.

So what

The merger of $850 million market cap Banc of California and $1.15 billion market cap (as of Wednesday) PacWest will result in a single bank with $36.1 billion in assets, $25.3 billion in loans outstanding, and $30.5 billion in deposits. It will be headquartered in Los Angeles, and focus its business on Southern California, where it will operate some 70 branches. Post-merger, the institution will retain the Banc of California name.  

Logistically, the merger will be conducted by Banc of California buying PacWest, paying in the form of 0.6569 shares of the former for each share of the latter. Additionally, Banc of California will raise $400 million in funds from Warburg Pincus and investment vehicles managed or advised by Centerbridge Partners and its affiliates in order to strengthen the balance sheet of the new bank.

After the merger closes, PacWest's current shareholders will hold about 47% of the equity of the new bank, Banc of California's current shareholders will hold 34%, and Warburg Pincus and the Centerbridge Partners vehicles will combine to hold the remaining 19%.

Now what

That all implies a post-merger market capitalization of about $2.1 billion for the new bank -- actually a bit more than what the combined market caps of the two institutions now, which suggests that those involved see a bit more room for these shares to rise, even after PacWest's steep run-up in share price Wednesday. The more so given that the parties to this transaction estimate that merging the banks will result in a 20% boost to earnings per share post-merger in 2024.

PacWest and Banc of California say they're planning to close this merger no sooner than late 2023, and perhaps as late as early 2024, regulators permitting. So investors still have at least a few months in which to decide whether the potential for share prices to drift higher -- and the potential for a big boost to earnings next year -- justifies a purchase of PacWest shares even after Wednesday's big price jump.