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Oct 223 min read

Equity Offering Impact: Atlantic Union Bankshares Analysis and Recommendation

Summary


  • Atlantic Union Bankshares issued 9.86 million shares, with the potential for 1.48 million additional shares if the underwriters' options are exercised, leading to a dilution of 12.63%, increasing the total share count to 101.12 million.

  • The price floor post-dilution is estimated at $33.91, but accounting for the returns from equity proceeds, it adjusts to $37.36. If the underwriters' options are not exercised, the price floor would increase to $37.59, with an expected upside of 3.37%.

  • We initiate a 'moderate buy' recommendation with a target price of $37.40.


Catalyst


On October 21, 2024, Atlantic Union Bankshares Corporation (NYSE: AUB) announced that it priced an underwritten public offering of 9,859,155 shares of its common stock at a price of $35.50 per share, for an aggregate offering amount of $350.0 million [1]. The underwriters have been granted the option to purchase up to an additional 1,478,873 shares of AUB common stock [1]. If such option is exercised, AUB plans to enter into an additional forward sale agreement with the forward purchaser in respect of the number of additional shares of Atlantic Union's common stock that is subject to the exercise of such option [1]. The company's shares dropped 6.70% on the disclosure of the news.


Analytical Framework Outlined


In this research, we divide the impact of the analysis into two distinct segments: 1) equity dilution stemming from the issuance of shares, and 2) return on equity raised from the proceeds of the offering. We also present the case with and without the optionality offered to the underwriter, as mentioned in the press release. The reference price and date are set at $38.81, which is the latest closing price prior to the disclosure of the announcement on October 18, 2024.


Dilution Impact


Based on the latest filing, there were 89,782,844 common shares outstanding [2]. With the direct share issuance and the potential exercising of the options granted to the underwriters, we approximate the post-transaction share count to be 101,120,872, implying a dilution of 12.63%.

Return on Proceeds



A 5-year lookback into the company's profitability on their equity capital, as measured by return on equity (ROE), has been relatively stable, ranging between 6% and 10%. For this reason, the remainder of the analysis on potential return from the proceeds raised through equity capital assumes a base case ROE of 7.17%. Given the total 11.3 million equity shares issued, using the treasury stock method, this implies proceeds from the issuance of $409,983,092, which in turn suggests an annual net income of $29,395,787 generated from the usage of this capital, returned to equity investors. Using our cost of equity assumption of 8.44%, we calculate the present value of the potential return generated from the equity offering to be upwards of $348.4 million, which equates to $3.45 per share [3]. Present value is calculated using the constant perpetuity approach, assuming a going concern basis.



Putting it All Together


Given our reference price of $38.81, with the dilutive impact adjustment, we expect the price floor to be $33.91. However, when considering the potential return on equity proceeds, the dilution impact is mitigated by an additional $3.45 per share, leading to an adjusted price floor of $37.36. With the current price of $36.14 as of our analysis, we anticipate a total upside of 3.37%.


Other Considerations


So far, we have assumed that the options granted to underwriters are likely to be exercised, which would result in a greater dilutive impact and more equity proceeds from the offering. However, in the case where these options are not exercised, the price floor target would be adjusted to $37.59 per share, as presented below:



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