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Nov 26 min read

Assessing Mid Penn Bancorp: Price Targets and Growth Opportunities Post-Acquisition and Equity Offering


Summary

  • On November 1, 2024, Mid Penn Bancorp, Inc. announced a public offering of 2,375,000 shares at $29.50 per share, with a potential additional purchase option of 356,250 shares. Concurrently, Mid Penn and William Penn Bancorporation entered into a definitive all-stock merger agreement valued at approximately $127 million, expected to close in the first half of 2025.

  • Integrating the public offering and acquisition analyses suggests a combined share issuance that results in an estimated 69% dilution for existing shareholders; however, the acquisition is expected to significantly mitigate this dilution.

  • We are initiating a 'strong buy' recommendation with a price target of $44.20, representing an approximate upside of 44.8% based on the closing price on November 1, 2024.


Catalyst


On November 1st, 2024, Mid Penn Bancorp, Inc. (NASDAQ: MPB) announced the pricing of its public offering of 2,375,000 shares of its common stock, at a price to the public of $29.50 per share, for an aggregate offering amount of $70 million [1]. Additionally, the Company has granted the underwriters a 30-day option to purchase up to an additional 356,250 shares of common stock at the public offering price, less underwriting discounts [1].

Jointly, the Company and William Penn Bancorporation (NASDAQ: WMPN) announced today that they have entered into a definitive agreement and plan of merger, pursuant to which William Penn will merge with and into Mid Penn in all-stock transaction valued at approximately $127 million, based on Mid Penn's closing stock price as of October 30, 2024 [2]. The Merger has been approved unanimously by each company's board of directors and is expected to close in the first half of 2025 [2].

According to the terms of the merger agreement, shareholders of William Penn will receive 0.4260 shares of Mid Penn common stock for each share of William Penn common stock [2]. Additionally, all options of William Penn will be rolled into Mid Penn equivalent options [2].


Analytical Framework Outline


We begin by separately analyzing the two primary catalysts: the public offering and the acquisition. To assess the potential price floor following the public offering, we evaluate the details provided in the Company's disclosure, assuming that underwriters will exercise their options, thereby introducing an additional dilutive effect. We utilize historical return on equity (ROE) as a benchmark to gauge the impact on per-share value on the proceeds from the share issuance.


Next, we examine the anticipated value creation of the acquisition, evaluating Mid Penn Bancorp's merger with William Penn Bancorporation on a pro forma basis. This includes analyzing transaction specifics and applying valuation multiples, particularly the price-to-book ratio, to estimate value ranges attributable to the merger.


Finally, we integrate the findings from both catalysts to construct a joint scenario. In our base case, we assume that none of the shares issued from the offering will be allocated toward acquisition funding. However, we also provide a range of potential values, adjusting for various levels of share issuance proceeds allocated to the acquisition across various range of book-value multiples.


Public Offering Analysis

With 2,375,500 shares primarily issued and the underwriters granted an option to purchase an additional 356,250 shares, the combined implied share issuance totals 2,731,250 shares. This issuance represents a 16.36% dilution to existing shareholders based on the most recent share count disclosed in the latest quarterly filing. At an offering price of $29.50 per share, the transaction is expected to generate approximately $80.6 million in proceeds. The summary details are as follows:



As with all dilution impact assessments, focusing solely on the dilution percentage can lead to an overly conservative view of the potential negative effects of share issuance. To provide a balanced perspective, it is essential to consider the potential return on equity (ROE) from the proceeds. Over the past 16 years, the Company has posted only one year of negative ROE, with an average ROE of 8.12% and a median ROE of 9.16%. In our base case, we assume the Company can generate value at the median ROE of 9.16%, which, applied to the total offering proceeds, suggests an incremental annual net income of $7.4 million. Assuming a going concern with a 6.51% cost of equity, we estimate that the potential value created from the equity proceeds amounts to $113 million, or $5.83 per share relative to the new diluted share count. The following visualization summarizes the historical ROE alongside these calculations:

Considering the dilution impact and incorporating the present value of the expected return on equity proceeds, the implied price estimate is $32.26 per share, as shown below:



Acquisition Analysis


In conjunction with the proposed share offering, the Company has announced the intended acquisition of William Penn Bancorporation at a valuation of $127 million for full ownership. Based on the pre-established transaction details, which include a 0.426 exchange ratio and an offer price referenced to the October 30, 2024, closing price, the transaction is expected to result in the issuance of approximately 9.35 million new shares. This issuance would represent a 56% dilution relative to the most recent share count provided in the latest quarterly filing.



To estimate the total pro forma equity value for the combined entity, we start by noting that William Penn Bancorporation reported $812 million in total assets, $465 million in loans, and $630 million in deposits. Based on the latest quarterly filing, the Company’s total equity value stands at $542.4 million, and the acquisition is expected to increase this to $1.18 billion. Prior to the acquisition announcement, the Company was trading at a 0.97x multiple of book value. Applying this multiple to the pro forma equity value yields an approximate total value of $1.15 billion for Mid Penn Bancorp post-acquisition. Taking the implied share issuance into account, this translates to a projected price target of $44.40 per share.



Putting It All Together


To this point, we have treated the two catalysts—the proposed equity offering and the acquisition—as separate events, analyzing and valuing them independently. In our initial analysis, considering only the dilution from the equity offering, we estimated a price floor of $32.26 per share. Conversely, when evaluating the potential combined entity post-acquisition of William Penn Bancorporation, we arrived at an approximate price target of $44.40 per share, assuming a constant book multiple. However, it is likely that these two events are interconnected. We believe that a portion of the proceeds from the equity offering may indeed be allocated to fund the acquisition. This view is supported by the Company’s press release, which states, “The Company intends to use the net proceeds of the offering to support its continued growth, including investments in Mid Penn Bank to support organic growth, potential redemption of subordinated debt, future strategic transactions, and general corporate purposes [1]. "


In this section of our independent research, we integrate the two analyses. We maintain a fixed total number of shares to be issued under the proposed public offering, while the implied share issuance associated with the proposed acquisition varies based on a specific percentage of the shares issued from the offering that are expected to be allocated to fund the acquisition. For instance, if we estimate a total share issuance of 2.7 million shares from the offering and assume that 50% of these shares will be allocated to the acquisition, the shares issued to fund the acquisition would decrease from our initial estimate of 9.3 million shares to approximately 7.9 million shares, reflecting a reduction of 50% based on the offering.


After making these adjustments, we perform the same book multiple valuation using the newly adjusted number of shares outstanding. The value creation considered in our share offering analysis, which is based on a historical benchmark return on equity (ROE) of 9%, remains valid as long as the assumed percentage of the offering attributed to the acquisition does not reach 100% of the total proposed offering. Consequently, we add the present value of the remaining proceeds while keeping the ROE at this level.


To conclude the analysis, we present a range of price target estimates derived from the combined analysis, considering various book multiples and assumptions regarding the percentage of the offering allocated to funding the proposed acquisition.


Base Case Estimate (Combined Analysis)


In our illustrative base case for the combined analysis, we conservatively assume that 20% of the shares issued from the offering will be allocated to fund the acquisition. With a proposed share offering of 2.7 million shares, this translates to 546,250 common shares being designated for the acquisition. When netted against our estimate of additional shares issued for the acquisition, this results in a combined total issuance of approximately 11.5 million shares, representing a 69% ownership dilution for existing shareholders.


Conducting the same book value multiples-based analysis as in the acquisition-only scenario, while maintaining a constant book value multiple, implies a market capitalization of $1.15 billion, or $40.97 per share, based on the adjusted share count. To finalize the price estimate, we incorporate the return on equity proceeds derived from the potential returns associated with 80% of the proposed offering, while maintaining the historical median ROE percentage and cost of equity used in the previous analysis. This leads to a base case target price estimate of $44.18 per common share of Mid Penn Bancorp (MPB).


Other Considerations


So far, we have assumed a constant price-to-book multiple and a fixed allocation of 20% of the equity offering toward the proposed acquisition. To address the static nature of our analysis, we conclude by presenting the following table, which displays various target price estimates across different price-to-book multiples and varying percentages of the offering allocated to the proposed acquisition.


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