Challenger bank Shawbrook (LSE: SHAW) has been dragged into the limelight during the past few days as a bid for the bank has emerged from its former private equity owners, Pollen Street Capital.
Pollen, which still owns just under 40% has teamed up with BC Partners to try and take Shawbrook private.
An initial offer of 330p per share from the private equity consortium has been rejected by Shawbrook’s management, who believe the bank is worth more. According to management, other leading shareholders have also indicated that they would prefer Shawbrook to decline the offer.
It’s easy to see why shareholders are not jumping at the chance to offload their holdings in the bank. Shawbrook published its full-year 2016 results today, and the numbers are nothing short of impressive.
For the year, the bank reported a net interest margin — the difference between what it pays out in interest to depositors and receives from lending — of 5.6%, down slightly year-on-year but still several percentage points above that of its larger peers. The group’s cost-to-income ratio fell to 45.1%, versus 48.3% a year ago. Profit before tax expanded 14% to £91.4m and statutory profit before tax leapt 26% to £88.2m. At the end of the year the bank’s Tier 1 capital ratio came in at 13.3% vs 14.4% a year ago.
City analysts expect Shawbrook’s growth to continue. Analysts have pencilled-in earnings per share growth of 23% for full-year 2017 and a further 14% for the year after. If the firm hits these targets, then Shawbrook will have successfully increased earnings per share by just under 120% in five years. Over the same period, pre-tax profit is set to expand by 200%.
A higher offer needed
It’s no surprise that with such rapid growth expected, Shawbrook’s management is looking for a higher offer from its potential suitors. City analysts believe that to win over management, Pollen will have to return with an offer of 350p per share or more. Even at this level there could be some shareholders who want even more.
Still, Shawbrook’s projected growth could be worth paying up for and Pollen may come back with a higher offer. If the private equity house does decide to return, it will have to make its mind up in the next few weeks.
According to the City’s code on takeovers and mergers, the consortium must either announce a firm intention to make an offer for Shawbrook or announce that it does not intend to make an offer by no later than 5.00 pm on 31 March. If the consortium does come back with 350p or more, shareholders could see a return of 13.6% in just a few weeks based on the bank’s share price at time of writing. And if no offer emerges, investors are still set to profit as Shawbrook’s growth takes off over the next few years.
Shares in the bank currently trade at an estimated 2018 P/E of 8.5.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.