NEW YORK (Reuters) – A blank-check company controlled by hedge fund manager Warren Lichtenstein will acquire Frontier Financial Corp (FTBK.O), a troubled Washington state bank with $4 billion in assets.
The deal is the latest in a recent series of financial services takeovers by so-called special purpose acquisition vehicles — listed companies that raise capital with the sole purpose of pursuing takeovers.
SP Acquisition Holdings Inc (DSP.A), announcing the deal on Friday, said it would swap 0.053 share and 0.053 warrant with an exercise price of $11.50 a share for each Frontier common share. SPAH has about $429 million in assets.
Stockholders of the Everett, Washington, bank will receive 2.5 million SPAH shares with a total value of $24.4 million, based on SPAH’s closing price on the American Stock Exchange Thursday, plus 2.5 million warrants.
The stock and warrants will be listed on a national stock exchange, SPAH added.
SPAH, organized in February 2006, expects to complete the transaction in the fourth quarter.
“This opportunity is attractive when considered amidst the backdrop of today’s historically low bank stock valuations and the opportunity for improved valuation in the future,” said Lichtenstein, head of activist hedge fund Steel Partners and chairman of SPAH.
Lichtenstein said the deal would provide capital needed by Frontier to work out its portfolio of bad loans and enable it to expand with new loans and a plan to attract more business customers.
Community and regional banks hit hard by consumer and real estate credit losses are offering tempting targets for private equity and hedge fund managers seeking bargains. Banks in dire need of fresh capital may also provide a timely opportunity for blank-check companies, many of which were organized in a wave of merger hysteria, only to see credit markets and takeover activity freeze up in 2007.
Two weeks ago, two Nevada community banks were acquired from Colonial BancGroup Inc by blank-check company Global Consumer Acquisition Corp (GHC.A). GCAP also purchased 1st Commerce Bank, a unit of Capital Bancorp Ltd (CBC.N).
In a related matter, Liberty Acquisition Holdings (International) Co agreed to buy two insurance companies, Pearl Group Ltd and Opal Reassurance Ltd. Liberty is adopting the name Pearl Group. The sponsors of Liberty two years ago had a New York-listed blank check that acquired London-based hedge fund GLG Partners.
SPAH said that after the Frontier deal is approved and completed, the combined company will do business as Frontier Financial Corp and the bank’s executive team will remain in place. The board will include members representing SPAH shareholders and current Frontier directors.
Announcement of the deal comes just two days after Frontier reported a quarterly loss, a threefold jump in loan loss provisions, and soaring bad loans. The bank said on Wednesday that it was looking to boost capital through a private equity investment.
In March, banking regulators issued a cease-and-desist order to Frontier, which then agreed to improve its capital level, revise lending policies, and change the role and make-up of its management.
Private investment funds are expected to be an important source of new capital for the nation’s banks, though U.S. regulators are wary of placing consumer deposits in the hands of investors who may only be seeking quick gains.
A handful of investment firms, including Fortress Investment Group (FIG.N), Wilbur Ross, Lightyear Capital and Carlyle Group, have snapped up banks in Florida and are pursuing bank deals in other states.
SPAH’s deal with Frontier is good news for investors in Lichtenstein’s hard-hit Steel Partners II hedge fund, which two weeks ago began the process of converting into an exchange-listed holding company.
Steel Partners II, which has plunged in value over the past year, was weighed down by concentrated investments in hard-to-trade assets like SPAH. The Frontier deal will create a more liquid and potentially more valuable asset.
Shares of SPAH fell 3 cents to $9.72 in morning trade on the American Stock Exchange, while Frontier rose slightly to 89.76 cents on the Nasdaq.
(Reporting by Joseph A. Giannone; Editing by Lisa Von Ahn and John Wallace)