Cash Offers & Rival Bids: Inside Bear State Bank’s $391M Sale

Randy Dennis thought Arvest Bank of Fayetteville and Bear State Bank of Little Rock would be a good fit.

In March, Dennis, the president of DD&F Consulting in Little Rock, asked Rick Massey, chairman of Bear State, for permission to discuss his idea with Jim Walton, Arvest Bank’s chairman.

Massey agreed.

“I thought there was something there,” Massey told Arkansas Business last week.

The talks resulted in privately owned Arvest’s offer in August to buy Bear State Financial Inc., the publicly traded parent company of Bear State Bank, in a cash transaction valued at about $391 million, or $10.28 per share of Bear State common stock. The transaction is one of the largest deals in Arkansas this year and will be the largest ever for Arvest if approved by shareholders in a vote set for Nov. 15 at Bear State’s Little Rock headquarters.

The announcement of the deal, however, has prompted lawsuits by class-action attorneys against Bear State and its directors. In one case, attorneys representing Bear State Financial shareholders are asking to stop the sale because they believe a better deal was ignored.

That better offer came from a publicly traded financial institution referred to only as “Company A” in Bear State’s proxy filing, but identified as Simmons First National Corp. of Pine Bluff by a source close to the deal. George Makris, Simmons’ chairman and CEO, was unavailable for comment last week.

Massey said Arvest made the better offer.

“At the time we made our decision, the Company A offer, which was a stock offer, … was way below the $10.28 [offer] that we had from Arvest,” Massey said. Simmons’ offer per share would have been $9.86 at the time, according to the proxy.

Massey said there are enough early votes from shareholders to approve the transaction. If the deal isn’t completed, however, Bear State could be forced to pay Arvest a $14 million breakup fee as outlined in the sale agreement.

In the lawsuit, originally filed in Pulaski County Circuit Court but moved to federal court last week, shareholders allege the sale benefits Massey but hurts other shareholders.

Massey is the managing member of Bear State Financial Holdings LLC, which in 2011 bought controlling interest in and recapitalized a struggling publicly traded thrift known as First Federal Bancshares of Arkansas. The LLC now holds the biggest block of stock in Bear State at 40.28 percent, and Massey has sole voting power over those shares.

The proposed transaction “is the result of a fundamentally flawed and unfair sales process that was led by … Massey,” according to a lawsuit filed by attorney Juan Monteverde of New York on behalf of Bear State shareholders.

The lawsuit said Company A’s stock offer had an implied value of up to $10.95 per share at its highest point. That’s about 6.5 percent more than Arvest’s cash offer.

“Massey and the remaining Defendants failed to seriously pursue this alternative offer because the consideration was in the form of stock and Massey was only interested in all-cash offers, which will enable him to quickly liquidate his otherwise illiquid holdings in Bear State,” the complaint said. The allegations against the board members include breach of fiduciary duties. If the sale goes through, the shareholders are seeking an unspecified amount of damages.

Bear State President and CEO Matt Machen didn’t return a call for comment. Bear State’s proxy statement said that “defendants believe these allegations are without merit and intend to defend vigorously against these allegations.”

Massey also said the lawsuits are “meritless” but expected.

“The unfortunate reality of the corporate world today is every deal over … a couple of hundred million dollars involving a public company … draws these kinds of lawsuits,” Massey said. “And they’re essentially just methods to get plaintiffs’ lawyers’ fees.”

In any case, the bank’s proxy filing with the U.S. Securities & Exchange Commission provides some insight into the making of the transaction between Arvest and Bear State.

The Offer
On March 13, Dennis, the bank consultant, spoke with Arvest’s Walton, the youngest son of Wal-Mart Stores Inc. founder Sam Walton, about buying Bear State.

Walton said that “Arvest might be interested in a potential transaction, but it could not engage in serious discussions at that particular time,” according to the proxy.

Dennis kept talking with Arvest over the next several weeks as Bob Kelly, chief risk officer for Arvest, started reviewing Bear State’s publicly available documents.

It didn’t take long before Arvest was interested in buying Bear State. In April, Kelly asked Bear State for some private information about the publicly traded bank.

Arvest liked what it saw from Bear State, which has $2.2 billion in assets and 41 full-service locations, including 29 in Arkansas. Bear State is also profitable. For the first nine months of this year, it reported net income of $16.7 million, up by more than 30 percent compared with the same period in 2016.

On June 13, Walton and Rick Chapman, vice president of Arvest’s holding company, Arvest Bank Group Inc., met with Massey and Dennis in Bentonville.

Chapman and Walton said Arvest wanted to buy Bear State in a cash deal. Arvest’s assets are about $17 billion.

Nine days later, Chapman proposed to Massey that Arvest pay $10.53 per share of Bear State stock, subject to due diligence and other conditions. The offer represented a premium of about 10 percent over Bear State stock’s closing price of $9.55 on that day and a 2.04 multiple of Bear State’s book value as of June 30.

During a special meeting held June 26, Massey told the board about Arvest’s proposal.

“The board discussed its strategic plan as a stand-alone bank, including business and regulatory challenges facing Bear State,” the filing said.

While Bear State’s assets had increased by 12 percent during the previous year, Massey seemed concerned about future growth opportunities.

He reminded the board that since 2011, when Bear State Financial Holdings entered the ownership picture, the plan had been to grow the bank organically and through acquisitions.

Massey said “that with increasing regulation and declining margins, he believed Bear State Bank needed to grow to between $3 [billion] and $5 billion in total assets to continue to generate attractive yields,” according to the proxy document.

Massey also added during the June board meeting that it was getting difficult to find banks that Bear State would want to acquire.

The board authorized Massey and senior managers to continue talking with Arvest and entered into a confidentiality agreement with it.

Simmons’ Proposal
Meanwhile, Massey, Dennis and others created a list of six banks to talk to as likely prospects to be interested in buying Bear State. Seeking other offers was designed to help determine whether Arvest’s offer was a fair one.

Simmons was the only financial institution among the six that said it was interested in buying Bear State. Its offer included using stock to buy Bear State, at an equivalent price of between $9.45 and $10.95 per share of Bear State stock.

During a July 26 meeting, Bear State’s board discussed both offers.

The board said that Simmons’ proposal required Bear State to end talks with Arvest. In addition, a final Simmons offer would come no earlier than the fourth quarter of this year, and the value of the publicly traded stock Simmons would use as currency could fluctuate.

“After discussing the Arvest proposal and the Company A proposal, the Bear State board determined that the Arvest proposal constituted a superior proposal,” the proxy said.

Still, the board asked Dennis to continue negotiations with Simmons.

The board also agreed to hire the investment banking firm Raymond James & Associates Inc. of St. Petersburg, Florida, to evaluate the offers. Bear State would pay Raymond James $600,000 for the report.

Deal Closes
At a Bear State board meeting on Aug. 11, Massey asked Arvest to confirm the $10.53-per-share purchase price.

“The Arvest representatives would not commit to the price,” the proxy said.

Massey took that to mean Arvest’s offer price would drop, which it eventually did to $10.28 per share of Bear State’s common stock, the proxy said.

It was still better than Simmons’ offer, which on Aug. 11 would have been $9.86 per share.

“At this time, the board reconfirmed its view that the Arvest proposal was superior,” the proxy said.

And the board came to the conclusion that another bank wouldn’t be able to improve on Arvest’s offer. “Following these discussions, the directors unanimously and preliminarily approved the Arvest proposal,” the proxy said.

On Aug. 21, the Bear State board received the final offer from Arvest, which included the $10.28-per-share figure. “The board noted that even with the decreased price, the Arvest proposal remained superior to the Company A proposal, which then reflected a $9.75 per share value based on the then current trading price of Company A common stock,” the proxy said.

Massey told Arkansas Business that Company A’s offer, in addition to being lower, was also speculative. “They had to get a couple of other deals closed before they would even sign a contract with us,” he said. “So it was a bird in the bush.”

Raymond James’ report concluded that the Arvest offer was fair from “from a financial point of view, to the holders of Bear State common stock,” according to the proxy.

The board members agreed.

The announcement of the proposed acquisition was made on Aug. 22. The deal is expected to close in the fourth quarter of this year or the first quarter of 2018 and is subject to customary conditions, including regulatory approval and approval by the shareholders.

Once approved, DD&F, Dennis’ bank consulting firm, will be paid $1.6 million. Bear State and Arvest have paid DD&F total fees of $506,000 in the last two years, Bear State’s filing said.

Lawsuits Filed
Less than three weeks after the announcement of the acquisition, the first of three lawsuits were filed against Bear State and its directors. Two of the lawsuits are in federal courts in Arkansas and allege that Bear State failed to disclose enough information to shareholders in connection with the transaction. The third argues that the Simmons offer was better for shareholders.

“We believe that and our counsel is of the opinion that none of that information that they’re asking for is material or necessary to assist the shareholder in making a decision,” Massey told Arkansas Business. “We’re filing an answer to that effect here pretty soon, and so we feel very strongly that we’ll be victorious, as are most companies faced [with] this situation.”

Bear State Asks Shareholders to Approve Compensation Packages
In addition to requesting that Bear State Financial Inc. shareholders approve the sale to Arvest Bank of Fayetteville, Bear State wants them to approve a “golden parachute” compensation package for Bear State’s executive officers.

If the merger is approved, Tom Fritsche, chief risk officer, would receive the highest total compensation from the package with $1.16 million, according to Bear State’s proxy, filed with the U.S. Securities & Exchange Commission. The money would come from $700,000 in cash and $461,000 from outstanding and unvested stock options and restricted stock shares. The executives had change-in-control severance agreements as part of their employment. The compensation proposal, though, is not binding.  

Matt Machen, president and CEO of Bear State since the resignation of Mark McFatridge in January, would receive a total compensation package of $1.14 million, $736,000 in cash and $409,000 from equity that includes outstanding and unvested stock options and restricted stock shares.

The special shareholder meeting for the vote is set for Nov. 15 at 10:30 a.m. at Bear State’s headquarters in Little Rock.