PacWest Bancorp PACW and Banc Of California Inc BANC entered into a definitive agreement late Tuesday to combine in an all-stock merger transaction. Here's what the street has to say about the transformational bank merger.

Wedbush

Wedbush analyst David Chiaverini views the business combination as fair, but not "overwhelmingly attractive" for PacWest shareholders.

PacWest's tangible book value had been improving since widespread banking issues rocked the industry earlier this year. Asset dispositions were occurring with manageable marks and progress was being made on expense savings initiatives, the Wedbush analyst said. 

Yet PacWest was considering a potential sale before the turbulence in the banking industry hit and shares were trading in line with industry peers on a price-to-earnings basis, so the merger seems fair, Chiaverini said. 

The question is whether shareholders will approve the deal given the apparent valuation discount the bank accepted, he said. Ultimately, the Wedbush analyst believes the deal will go through at the beginning of 2024, but he wouldn't be surprised to see some shareholder dissent and the potential emergence of a third-party bid. 

Wedbush has a Neutral rating on PacWest and raised the price target from $8 to $10. 

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RBC Capital Markets

RBC Capital analyst Jon Arfstrom took a more optimistic stance on the merger.

"We support this merger and believe the combined company can be stronger than as individual ones, especially in the case of PacWest," Arfstrom said in a new note to clients. 

The banking crisis in March caused PacWest to lose considerable value. Although management has done well to restore confidence, the next phase of recovery would require heavy cost-cutting and significant shrinking of the balance sheet, the analyst said. 

"By selling to and combining with Banc of California, the cost savings required should be easier to achieve, and the large infusion of private equity also helps to mitigate any lasting concerns on capital," Arfstrom said.

Although the implied valuation in the sale is around $10.51 per share, which is well below what the bank was worth prior to the banking failures, the merger solves a lot of the outstanding questions that were circling the bank as a standalone entity, he said. 
RBC has an Outperform rating on PacWest with a $13 price target. 

Keefe, Bruyette & Woods

Keefe, Bruyette & Woods analyst Kelly Motta sees the merger as a win-win for shareholders on both sides. 

"Both BANC and PACW are shedding wholesale funding and noncore/ lower return businesses, bringing together the best of both franchises to drive higher returns for shareholders," Motta said in a new note to clients.

She described the deal as "very financially compelling." Although there are a lot of moving pieces that still need to be sorted, the business combination will create the third largest bank headquartered in California with $36 billion of assets, the Keefe, Bruyette & Woods analyst said. 

Upon closing of the deal, capital is expected to be robust and earnings are expected to get about a 20% bump, Motta said. The analyst has an Outperform rating on Banc of California with a $16 price target.

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