Blue Ridge Bankshares Inc. is aiming to push its pending recapitalization over the finish line and walked away from a potential purchase offer from Southern BancShares. This was confirmed by three different sources with knowledge of the matter, who spoke on condition of anonymity because the discussions have not been made public.
Late in 2023, Mount Olive, NC-based Southern BancShares offered to acquire the Charlottesville, Va.-based Blue Ridge, which is under a regulatory consent order, for between $4.50 and $5.50 per share, a premium between 30.8% and 59.9% to the company's $3.44 closing price Dec. 20, 2023, the day before the offer was made. Southern's offer was contingent upon the company being able to raise additional capital to support the transaction, with the raise to be partially backed by the Holding family, which leads First Citizens BancShares Inc. and has two members on Southern's board.
Officials at Southern and Blue Ridge declined to provide comment for publication.
Banks are not required to disclose purchase offers they receive, according to Patrick Hanchey, a partner at Alston & Bird, who spoke generally and not specifically about this situation.
"Generally speaking, there's not an obligation or expectation for management to communicate a potential M&A transaction to shareholders," Hanchey said in an interview. "If management considered it and declined it, as long as they have a good faith basis for doing so, then it would be very difficult for shareholders to bring a claim after the fact that they didn't do the transaction."
Shareholders to vote on recap
Blue Ridge's leadership has set a March 6 shareholder vote on the company's previously announced $150 million recapitalization in the form of a private placement. The company's shareholders will face dilution through the recapitalization, which calls for the issuance of 60 million new common shares, more than triple the company's current 19.2 million outstanding, at $2.50 per share.
The recapitalization is being led by private investor Kenneth Lehman as well as Castle Creek Advisors VIII LLC. Upon closing, Lehman will own about 25% of Blue Ridge's common shares while Castle Creek will own about 12.5%. No other new investors will own more than 9.9%.
The company struck the capital raise after announcing that its bank subsidiary Blue Ridge Bank NA would face increased capital requirements that were part of a consent order from the Office of the Comptroller of the Currency (OCC).
The regulatory woes, which are largely tied to questions about Blue Ridge's financial technology relationships, have been a driver behind the company's share price losing 80% of its value since the start of 2023. Now, there is some concern among shareholders about the dilution from the capital raise.
"Once you do that, that's forever," one Blue Ridge shareholder told S&P Global Market Intelligence. "Certainly it wouldn't hurt to get rid of the bank regulators. But I don't want to get rid of them [by] giving away the bank."
Still, when interviewed, the shareholder was undecided about voting for or against the private placement.
Pros and cons of M&A
While Southern's acquisition offer presents a higher price than the pending private placement, price is not the only factor companies weigh when making strategic decisions. Other considerations sellers often take into account include the buyer's acquisition history and the prospects that the sale would receive regulatory approval.
While the Holding family and First Citizens have plenty of bank M&A experience, Southern does not have as much. The last time Southern completed a whole-bank deal was in 2016 when the company closed its purchase of Heritage Bankshares Inc. Heritage, which had $313.0 million in assets, is a much smaller target than Blue Ridge, which had $3.12 billion in assets at 2023-end.
Blue Ridge's size would have the potential of slowing the regulatory approval process in a possible sale to Southern. The OCC's recent M&A approval guidance suggested deals involving a target that makes up less than or equal to 50% of the buyer's size are more likely to receive timely approval. However, Blue Ridge's asset size would make up about 64% of Southern's asset total, which stood at $4.88 billion at year-end 2023.
Another possible red flag that could slow regulatory approval is Blue Ridge's consent order. The OCC's guidance suggests that bank deals involving institutions without any open enforcement actions are more likely to receive timely approval.
In a December 2023 interview with S&P Global Market Intelligence, Blue Ridge President and CEO Billy Beale expressed concern about the bank's ability to secure regulatory approval if it were to strike a deal. "It would take a rare set of circumstances for a bank to be able to get approval to acquire us because of that written agreement," Beale said.
In general, banks have been facing extended closing timelines on M&A transactions. Since 2021, several US bank deals — such as Provident Financial Services Inc. and Lakeland Bancorp Inc.'s tie-up that was announced in September 2022 — have taken well over a year to close.
Given that dynamic, the capital raise is a more sure option compared to the unknown risks associated with regulatory approval of a sale, another source told Market Intelligence for this story.
Also, while Southern's offer can present a better near-term option for current Blue Ridge investors, one shareholder noted that the management is taking a longer-term view. The capital raise can look like a more attractive offer if Blue Ridge believes that its share price and tangible book value will recover in the next few years, and fetch a higher sale price down the road.
"Management clearly thinks that it's in their best interest to not sell," the shareholder said. "Even if someone offers $4, if the company is able to turn it around, they may think that they can get back to a $6 valuation on their own."