Magazine article American Banker

First Savings of Wisconsin Buys Industrial Firm to Raise Capital

Magazine article American Banker

First Savings of Wisconsin Buys Industrial Firm to Raise Capital

Article excerpt

CHICAGO -- Question: What does a savings and loan do when it needs to raise capital?

Answer: It buys a privately owned manufacturer of capital equipment for the textile industry.

At least, that was the solution for the First Savings Association of Wisconsin. And it is believed to be the first deal of its kind in the country.

"I've heard of a manufacturing company acquiring a thrift, but not the other way round," said Pam Kobielus, a vice president at the Milwaukee-based savings and loan.

The $1.2 billion-asset thrift had found itself with insufficient net worth to comply with federal and state regulations and needed a capital injection. In purchasing the Draper Corp., it found a way to convert its unissued common stock into capital, while Draper in turn will benefit from using First Savings' tax loss carry forwards. (These stem from the thrift's past lack of earnings. It posted a meager profit of $16,000 in the third quarter after losing $487,000 in the second and $3.35 million in the first).

Under the agreement, the shareholders of Draper will receive 833,333 previously unissued shares of First Savings stock valued at $10 million, or $12 a share (although they are currently trading at $8 to $9); some $5 million in cash; and the chance to earn another $15 million from Draper's profit over an unspecified period of time. Unissued stock does not count towards a thrift's net worth. But by issuing it at $12 a share First Savings notched up $10 million in capital.

For First Savings the deal will result in an immediate increase in regulatory capital of approximately $15 million, with the prospect of future increases from the addition of Draper's profits. For the year ended March 31, Draper had net income of more than $3 million.

"We converted our unissued stock into capital and placed it with one company. …

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