SEC document opens window into Klein/Old National deal

The June 21st announcement that Old National Bancorp had signed an agreement to purchase Klein Financial Inc., was more than eight months in the making. An August 2 Old National Bancorp S-4 registration statement with the Securities and Exchange Commission provides a timeline of events that starts in October of 2017 when representatives of the Sandler O’Neill investment banking firm made a presentation to senior managers at Chaska, Minn.-based Klein Financial. A deal came together between Klein and Indiana-based Old National in the coming months, and is expected to culminate on Sept. 27, 2018 when Klein Financial shareholders formally vote on the merger proposal.

The registration statement notes that Klein Financial Chairman and CEO Daniel Klein, Vice Chairman and EVP Alan Klein, and Vice Chairman James Klein, who collectively control 58.2 percent of the Klein Financial Corp stock, have stated they will vote in favor of the merger agreement.

Based on the price of Old National stock at $19.05 on June 20, the sale price in the all stock deal is $433.8 million. Klein Financial, the holding company for Klein Bank, has $1.97 billion in assets, more than 400 employees and 18 offices. The company has been in the Klein family for 111 years and the family collectively controls all voting and non-voting Klein Financial stock. There have been no sales of Klein common stock since the incorporation of Klein Financial in 1975.

On Jan. 22, 2018, Klein shareholders voted to explore the sale of the company. The next day, the board amended the corporation’s bylaws to create an executive committee to conduct an exploration of sale options. Daniel Klein, Alan Klein and James Klein were appointed to the executive committee. Doug Hile, president of Klein Financial, made a presentation at the meeting about a possible sale of the company. As part of the ensuing discussion, Hile recommended that Matthew Klein be appointed president of KleinBank, freeing up Hile to focus on the sale of the business.

On Feb. 6, Dorsey & Whitney, the Minneapolis-based law firm, was hired to provide legal counsel on the sales process. On Feb. 26, Klein Financial hired Sandler O’Neill to provide investment banking services. Sandler O’Neill and the Klein management team worked during the next two weeks to identify potential acquirers. A list of 10 companies was drafted, five of them being considered “A” list candidates, including Old National. The remaining five constituted a “B” list of candidates.

In March, four of the “A” list candidates and three of the “B” list candidates signed confidentiality agreements demonstrating their interest in exploring a deal with Klein Financial. One signer dropped out quickly, leaving six candidates which were given access to a virtual data room to conduct a preliminary level of due diligence. Four of the companies, all from the original “A” list, indicated they remained interested in a deal. Each of the companies submitted bids. The registration statement notes the executive committee’s acknowledgement that the financial value of each bid was very similar.

The four bidders were given access to additional due diligence information; also, the Klein management team visited with the management of each of the bidders in their respective offices. One of the bidders dropped out, leaving three interested potential acquirers.

On May 30, the executive committee met to review the final indications of interest; although each proposed a different mix of stock and cash consideration, the Old National proposal offered the highest aggregate consideration. It was noted the culture of Old National was comparable to Klein Financial, the statement says. Furthermore, it was discussed that there could be synergies with St. Paul-based Anchor Bank, which Old National had acquired the prior year. It was further pointed out that “Old National provided the most complete markup of the formal merger agreement, leaving less to be negotiated in order to finalize the definitive merger agreement.” The executive committee decided Old National was the best partner.

The next day, Klein Financial and Old National came to agreement and began working on a definitive agreement.

From June 1 to June 15, Old National completed its due diligence on Klein while Klein conducted reverse due diligence on Old National. Negotiations between the parties continue through June 20. On that day, after the executive committee approved the agreement, the full board of Klein reviewed and authorized the merger agreement. A joint press release from the two parties was published the next morning, prior to the opening of the financial markets.

Among reasons Klein Financial listed for supporting a merger:

  • The shareholders’, board’s and executive committee’s review of the risks and prospects of remaining independent, including the challenges of the current financial operating and regulatory climate, the increasing costs associated with banking regulation and Klein’s need to raise capital to continue to grow or acquire;
  • Old National’s current annual cash dividend of 52 cents per share, which is equivalent to $4.12 per share on the Klein shares of common stock exchanged for Old National shares of common stock, compared to Klein’s current annual dividend of $2.02 per share on an after-tax basis;
  • The belief of the executive committee and board that the merger, taking into account Old National’s 2017 acquisition of Anchor Bancorp., will result in a stronger commercial banking franchise with a diversified revenue stream, strong capital ratios, a well-balanced loan portfolio and an attractive funding base that has the potential to deliver a higher value to Klein’s shareholders as compared to continuing to operate as a stand-along entity;
  • The fact that upon completion of the merger, Klein shareholders will own approximately 13.0 percent of the outstanding shares of the combined company; and
  • The active trading market in Old National common stock that would give Klein shareholders greater liquidity for their investment if they desire to sell their shares of Old National.

The list includes no reference to Klein’s interaction with the U.S. Justice Department over alleged redlining. A DoJ complaint was filed in January 2017 over the bank’s lending practices; the issue concluded on May 8, 2018 when DoJ announced a settlement.

The SEC document says that “Old National expects to reduce expenses by combining accounting, data processing, retail and lending support, and other administrative functions after completion of the merger, which will enable Old National to achieve economies of scale in these areas. Promptly following the completion of the merger, which is expected in the fourth quarter of 2018, Old National plans to being the process of eliminating redundant functions and eliminating duplicative expenses.”