Sterling Financial sale worth 2.5x to sponsors, on paper

Target: Sterling Financial Corp

Buyer: Umpqua Holdings Corp

Price: $2 billion

Multiple: 2.5x

Sponsors: Thomas H. Lee Partners LP, Warburg Pincus LLC

Thomas H. Lee Partners LP and Warburg Pincus LLC each invested $170 million in Sterling Financial Corp in August 2010, with each receiving roughly a 21 percent stake in the Spokane, Washington, banking company. The firms provided nearly half of a $730 million recapitalization, one of a handful of non-control deals that occurred in the wake of the financial crisis as regulators pressed banks to raise additional capital.

Sterling Financial announced an agreement earlier this month to sell itself to Umpqua Holdings Corp of Portland, Oregon, in a cash-and-stock deal valued at $2 billion. Using that valuation, each firm’s holding would be worth about $420 million, equating to a 2.5x return for a roughly three-year holding period.

The two firms declined comment.

But the firms will not be realizing that return in the near term. The deal, which is expected to close in the first quarter, is mostly in the form of stock, with Sterling shareholders to receive 1.671 shares of Umpqua common stock and $2.18 cash for each share of Sterling. Umpqua valued the transaction at $30.52 per share, based on the closing price of its shares on Wednesday.

TH Lee and Warburg Pincus, the two largest shareholders in Sterling, have agreed to vote their shares in favor of the Umpqua deal, the two banks said in a joint announcement, and each firm will have the right to name one representative to the board of the combined company. David A. Coulter, the vice chairman of Warburg Pincus, sits on the Sterling board now, but Scott Jaeckel, a managing director at TH Lee who joined the board in 2010, stepped down in April.

Combining the $9.3 billion-asset Sterling with the $11.4 billion-asset Umpqua will form a banking company with roughly $22 billion in assets and 394 branches in Oregon, Washington, Idaho, California and Nevada. The banks said they would become “the West Coast’s largest community bank.”

Bett Rabatin, an analyst at Sterne Agee, observed in a note to clients that the transaction “provides limited cash for private equity.” And while Sterling’s sale to a larger bank might have made more sense, Rabatin said, “We are favorably disposed to the deal,” based largely on Umpqua’s track record in buying other banks.