Friday, April 18, 2003

CB Bancshares
says little

Net up 12.3%

By Dave Segal

CB Bancshares Inc., ending a month of virtual silence, gave its much-anticipated response yesterday to a buyout offer from CPB Inc.

City Bank But the parent of City Bank remained noncommittal about CPB's $285 million cash-and-stock bid and left Central Pacific Bank's parent wondering whether CB Bancshares would meet CPB's April 25 deadline.

"We confirm that we have received a proposal from CPB Inc. Chairman Clint Arnoldus and have taken it under evaluation," CB Bancshares President and Chief Executive Officer Ronald Migita said in a statement.

"Our board of directors and management are carefully examining the proposal and have asked that our shareholders take no action at this time. We will comment further as this matter proceeds."

Although CB Bancshares hasn't tipped its hand yet, its shareholders wasted little time yesterday in voting with their wallets. The stock shot up 44.1 percent, or $20.48, to an all-time high of $66.86 while CPB's stock fell 4.6 percent, or $1.17, to $24.13. It's normal for the stock of acquiring companies to fall after a merger announcement.

Arnoldus, who's also the president and CEO of CPB, said he was encouraged by CB Bancshares' response but not surprised by the lack of details.

"It's clear they have not taken this offer serious until now," Arnoldus said. "I'm not surprised by the brevity because until we went to their shareholders, it was clear they weren't giving this a lot of effort, a lot of thought."

Now, though, Arnoldus feels the wheels may start to turn. He said that when CB Bancshares' board reviews the offer with its advisers, he said they'll conclude that a merger will create "a larger, stronger locally run bank that is good for shareholders, customers, employees and Hawaii."

Arnoldus wouldn't say whether CPB would immediately take the offer to shareholders if its April 25 deadline is not met.

"It's very clear they've got a lot of work to do to be able to respond to us," Arnoldus said. "Our action will be triggered off of their response."

Calvin Say, a CB Bancshares board member and the speaker of the state House, said yesterday he didn't formally hear about CPB's March 17 offer until he received a certified letter from CPB on April 7 apprising him of the deal.

Say said the merger was not discussed at CB Bancshares' March 26 board meeting and said prior to the letter he only knew of the deal informally from some CPB consultants. He said when he contacted CB Bancshares manage- ment after receiving the April 7 letter he was told the matter was in discussion.

"The position of the board will be waiting for the management to make a recommendation to all of us at City Bank," he said. "At this point I really don't know (how the board will decide). But whatever they make as a presentation to us, that will probably decide where we go."

He said the presentation will be made by Migita; Richard Lim, president and chief operating officer of City Bank; and Dean Hirata, chief financial officer of CB Bancshares.

Say, who also is the chair of the City Bank audit committee, said he was at the bank Wednesday but didn't know about the merger announcement until after CPB's press conference that afternoon.

In another development, Arnoldus said in his earnings conference call yesterday that 10 branches of the combined bank might be closed following the merger. Previously, he had only said that there would be consolidation. The 10 branches refer to the number of sites in which there are both Central Pacific Bank and City Bank branches within one to two miles of each other. The two banks have a combined 45 branches.

"We have a working estimate of approximately 10 branches in close proximity to one another which could be considered for consolidation and provide an opportunity to reallocate resources to serve rural Oahu and neighbor island markets better," Arnoldus said. "No final decisions can be made until it's discussed with City Bank."

Meanwhile, an investment company analyst whose firm owns 5,000 shares of CB Bancshares' stock said CPB's offer is below market standards.

"The offer that they put on the table is an offer that you just can't ignore," said Peter Kovalski, who manages the Alpine Woods Growth Values Financial Equities Fund for Purchase, N.Y.-based Saxson Woods Advisors. "It's a somewhat realistic offer although I think the price is still a little bit on the low side. I think they're giving a little bit of cushion there if the board denies it. They can come back and sweeten the amount."

Kovalski said CPB has estimated that CB Bancshares' price/earnings ratio will be 13 times this year's earnings and 1.9 times tangible book value, which is the shareholders' equity per share. He said recent community bank deals elsewhere have been in the neighborhood of 17 or 18 times earnings and about 2 1/2 times book value.

"So there is room that they can make the numbers look good if they have to come back and sweeten the deal a little bit," Kovalski said.

But analyst Joe Morford, who covers CPB for San Francisco-based RBC Capital Markets, said CB Bancshares doesn't deserve a higher offer price.

"Yes, the industry averages for deals this size are higher," he said. "But CB Bancshares' profitably is well below average as well. They've been burdened with credit problems and have a high efficiency ratio (the measurement of how much it costs the bank to make a dollar of revenue).

"That's had a negative impact on the bottom line and, I think to some extent, that's reflected in the pricing of this transaction. I think the other thing to keep in mind is that CPB has not had the luxury of doing any due diligence here and is basing its bid on public disclosures and things. So it's hard to go out with a really high price when you don't know exactly the insides of what you're buying."

Arnoldus defended the bid, saying the 54 percent premium above CB Bancshares' Monday stock price is a great offer.

"I think it's a fair reflection of the value of that bank," he said.

Central Pacific Bank
City Bank

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