A Richmond-area bank is the latest target of a sometimes-aggressive investment firm that looks to force banks into selling themselves.
Essex Bank and its leadership are dealing with ongoing instigation from Driver Management Co., led by seasoned investment bankers who identify banks they think are undervalued and whose shareholders could benefit from a sale of the company.
Driver last year bought in as a shareholder of Essex parent company Community Bankers Trust Corp., which trades on Nasdaq.
Abbott Cooper, Driver’s founder and a UVA grad, said he then set out to privately meet with Essex executives to discuss moving toward a deal with a competitor.
When those initial discussions proved fruitless, Cooper said his firm turned to the next page of its playbook: ratcheting up the pressure and taking the message public.
Driver escalated its efforts earlier this month, first by issuing a letter to shareholders and the media, calling for shareholders to engage with the company’s leadership. It took particular aim at Essex CEO Rex Smith.
“Like many of you, we are concerned about the company’s standalone prospects and dismayed that the actions of (Smith) may have deterred numerous potential suitors,” Driver stated in the letter. “It appears to us that Mr. Smith has maintained unrealistic sale price expectations and has conditioned potential transactions on remaining a fixture in the upmost levels of senior management at any combined company.
“In light of this, we feel compelled to make you aware that we believe the board has fallen into the trap of remaining overly deferential to a CEO whose interests appear to conflict with those of shareholders.”
It called on the board to immediately hire investment bankers to pursue a sale.
The company’s stock spiked in the day or two after the letter to $9.57 per share, but has since settled back down to a more typical level, closing Friday at $8.83.
Smith briefly addressed the Driver issue last week in the company’s last earnings conference call, on which it announced profit for the full-year 2019 of $15.7 million, up from $13.68 million in 2018.
“First and foremost, we run your company to produce the best results in terms of earnings growth, dividend growth and stock price appreciation while conservatively managing credit, interest rate and a variety of other risks,” Smith said on the call.
“The board and management have worked extremely close through the years on all strategic initiatives, and we’ll continue to do so in the future. Further, the board discusses value creation internally at every monthly Board meeting. Information regarding any M&A activity is never withheld from the Board of Directors and those Board discussions are augmented through the engagement of a variety of well-respected investment bankers,” he said.
The company did not take any questions from analysts during the call.
Driver continued to prod last week, as Cooper appeared on Bloomberg TV in a segment that featured a discussion of ESXB, a stock that typically wouldn’t make waves on the national network. He questioned Smith’s statements about engaging investment bankers and whether they mean the company has truly hired such professionals to pursue a deal.
Smith, who for years has said the bank was always open to M&A opportunities, either as a buyer or a seller, spoke briefly with BizSense last week.
He largely repeated what was said in the earnings call, while adding that it’s difficult to discuss timing about any such potential deals.
“As far as timing goes, I know people want things to happen quickly. There are a lot of variables that take time to flesh out,” Smith said.
Asked if the bank has hired investment bankers for a sale, Smith said, “It’s completely inappropriate to try to say too much at any time about that.”
Smith owns 73,000 shares of the company’s stock as of November. Friday’s closing price gives those shares a market value of $646,000.
Its three largest shareholders are institutional firms, with Castine Capital Management, Wellington Management Group and Maltese Capital Management each owning more than 1 million shares.
Smith received total compensation of $942,000 in 2018, the most recent figures available.
Essex is only the latest target of Cooper and Driver Management.
Last year it forced changes at National Bank of Blacksburg, albeit not a sale. Presently, in addition to its efforts at Essex, it’s in the midst of a battle with First United Bank & Trust that’s gone public and turned ugly.
Driver has gone as far as taking out ads in the local paper and creating a website to criticize the bank and its CEO.
Cooper said the firm has a formula for how it identifies its target banks and a template for how it goes about inflicting pressure to get what it wants.
“The template for all of them is pretty much the same: We just identify publicly traded banks where the stock on a standalone basis is going to go sideways at best, but in a sale, investors could get a substantial premium,” Cooper said.
“We targeted banks for two reasons – it’s the industry that my partner and I know. The other is there’s a tremendous opportunity and need for this to happen. There are still 5,000 banks in the U.S. Consolidation has been the trend for 40 years.”
As for Essex, Cooper said he’s hopeful the bank will play ball, particularly because his firm believes there are banks interested in buying Essex at a premium.
“I think there are a bunch of banks that would be very interested in paying a premium,” for Essex, he said, adding that he thinks a realistic price for the bank is $11.50-$12.50 per share.
Cooper said banks such as Fulton Bank out of Pennsylvania, which has a presence in Richmond, is the sort of buyer for a bank like Essex.
“I would assume and hope they are working on something,” he said of Essex leadership. “If we don’t think they’re taking it seriously, we can ratchet up the pressure.
“There are a lot of things we can do. We have a pretty big arsenal of ways to fire up shareholders,” he said. “We’re not shy about highlighting the issues publicly.”