Canadian Western Bank (TSX: CWB) jumped as high as $44 (or almost 77%) on June 12 after the surprising news that National Bank of Canada (TSX: NA) was acquiring the regional bank. Based on the buyout offer, CWB shareholders would get 0.45 shares of National Bank. If you did the math at the time, it equated to $51.78 per share for CWB shareholders for the $5 billion acquisition.
CWB’s stock price was $43.18 at market close yesterday. Why doesn’t the Canadian bank stock trade in the $50 range?
Canadian Western Bank: A value stock before the incredible jump
First, let’s talk about the big jump from the June 11th market close price of $24.89. Based on CWB stock’s long-term normal valuation, it could trade at a price-to-earnings (P/E) ratio of about 10.6 to 12.4, which equated to a fair price of about $37 to $44 per share that investors could have used as a price target.
So, it was a nice value stock before the big jump. However, investors needed to have high conviction because the stock has traded largely between $22 and $27 per share (P/E of seven to eight) since June 2022, whereas it could be worth approximately $40 per share. It required a catalyst to reach the fair price range. And it just so happens that the National Bank buyout news performed the magic.
Why doesn’t CWB stock trade in the $50 range?
As mentioned earlier, if the deal goes through, CWB shareholders would get 0.45 shares of National Bank. Stock prices change and are impacted by news, such as macro news or company-specific news, including earnings releases. For example, since June 11, National Bank stock has declined about 7%.
NA stock price movement since June 11, 2024 Data by YCharts
Typically, in a merger, the stock falls for the acquirer. And since this is an all-stock deal, the changing NA stock price adds a layer of uncertainty. Who knows where NA stock will trade when the transaction closes? At $108.40 at writing, 0.45 shares translate to $48.78 per share for CWB shareholders.
Forget about $50, then. Why doesn’t CWB trade at $48-49 today? There’s uncertainty in the deal.
First, the transaction must be approved by CWB shareholders (two-thirds of the votes must say “yes”) in a meeting expected to occur in September 2024.
Second, it requires regulatory approvals. If regulators reject the deal, National Bank might need to pay CWB a “reverse termination fee equivalent to 4% of the CWB equity value” (which is just over $166 million based on the recent market capitalization), as noted in the press release.
Third, if all goes well, the transaction is expected to close by the end of 2025. Let’s say that happened in December 2025, which would be roughly a 1.5-year wait. This is a pretty long wait, and a lot can happen in between. Other than the reasons mentioned above, there could be a black swan event or other macro news that could impact the stock market or the NA stock price.
Fourth, the time value of money suggests that a dollar today is worth more than a dollar tomorrow. So, as time elapses and we get closer to the transaction close period, the CWB stock price should get ever closer to 0.45 of the NA stock price.
Should investors buy, hold, or sell CWB shares? All said and done, CWB is fairly priced today with a dividend yield of 3.2%. It pays a safe and growing quarterly dividend. If the deal didn’t go through, its valuation stayed at today’s levels, and its earnings remain resilient and growing, it could trade in the $48 in a couple of years, leading to total returns of about 7% per year. This is but one of the scenarios that could happen.
NA is also fairly priced today and could deliver annualized returns of about 9% per year over the next few years. Based on the press release, it “has identified $270 million of pre-tax annual cost and funding synergies, with upside from revenue opportunities.”
Depending on investors’ comfort with the uncertainties, CWB stock could be a “hold” or “sell” at current levels.
