PNC buying Maryland bank in $6 billion deal
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Making good on a pledge to boost its presence in the fast-growing Washington, D.C.-Maryland-Virginia market, PNC is buying Baltimore-based Mercantile Bankshares Corp. for $6 billion in cash and stock -- catapulting Pittsburgh's biggest bank to 11th largest in the country measured by deposits and bolstering its desire to remain independent.
Graphic: PNC stock falls
Map: PNC's expansion
The acquisition, announced yesterday and expected to close in early 2007, would add 240 branches to the PNC stable in Maryland, Virginia, Washington, D.C., and Delaware, building on PNC's $642 million purchase last year of Washington's Riggs National Bank. Mercantile would make PNC the second-largest bank in Maryland and Delaware, based on deposits, No. 4 in Washington and No. 6 in Virginia.
Adding Mercantile also would give PNC -- which already has more than 800 branches in eight states and the District of Columbia -- an East Coast geographic footprint stretching from the Hudson River to the Potomac River, cutting through some of the country's wealthiest and fastest-growing communities. Mercantile customers have a median household income of $69,363 -- $10,000 higher than PNC's customers -- and the population in its markets is expected to grow 10 percent the next five years, five times the projected increase in PNC's existing 78-county footprint.
"I think it's fairly self-evident that a combination of Mercantile and PNC will be a mid-Atlantic powerhouse,'' PNC Chairman and Chief Executive Officer James Rohr told analysts in an early morning conference call outlining the transaction.
PNC offered $47.24 a share for Mercantile, a 28 percent premium based on its Oct. 6 closing price, and the high number raised some eyebrows and was a major factor in PNC's stock falling 4.2 percent to $70.40 on the day.
But Gerard Cassidy, a banking analyst who covers PNC for RBC Capital Markets in Portland, Maine, said time will tell if the price was too high.
"Mercantile's franchise in Maryland and northern Virginia was a Neiman Marcus franchise," he said. "So PNC has to pay a Neiman Marcus price to get into that franchise. ... The execution of this transaction will determine whether [Mr. Rohr) overpaid."
Traders said PNC shares also fell on the belief that the transaction would undermine the stock's future appreciation by lessening the likelihood of a stock buyback and of PNC being acquired by someone else, as well as on doubts about the predicted cost savings of $108 million.
"They killed the stock," Tampa, Fla.-based banking analyst Richard Bove said of the immediate impact of the Mercantile deal on the potential for a continuing run-up in PNC's stock price. "But in the long run, will shareholders benefit more by what was done today than not? I think the answer is that shareholders will."
PNC's stock is still up more than 25 percent in the last year -- a boost driven by high earnings, a comeback from regulatory and accounting problems four years ago and the $1.6 billion it gained from a stake in BlackRock, the New York money manager sold to Merrill Lynch for $9.8 billion. That deal just closed.
Mercantile shareholders likely had few doubts about the sale -- its stock soared 22.2 percent yesterday, closing up $8.16 to $44.94, a new 52-week high.
Despite management's insistence that it was not for sale, PNC has been cited in the past as a potential takeover target by larger, expansion-minded banks. But with PNC's recent success and the addition of Mercantile, larger banks will now think twice before attempting a PNC acquisition, said Mr. Bove of Punk Ziegel & Co.
"Management is showing a desire not to be acquired," he said. "They are clearly signaling they want to continue to grow the company."
Meanwhile, Mr. Rohr "is still looking to put up on the table more deals, more transactions," said Mr. Cassidy, the RBC Capital Markets analyst. "I would be very surprised if Jim Rohr sells out in the next two to three years" -- although "five years out" could still be "another story."
The thought of a Mercantile acquisition first came to Mr. Rohr following the purchase of Riggs, a bank strong inside Washington D.C., but weak in the fast growing suburbs of the nation's capital. Mr. Rohr has made it clear since acquiring Riggs that he would expand PNC's presence in the region through acquisitions.
Mercantile chairman and chief executive officer Edward J. "Ned" Kelly said he and Mr. Rohr had kept in touch over the years, and that "Jim has always been interested in what it is we might do," but that talk about a merger did not really begin until a few weeks ago, as the BlackRock transaction -- and payoff -- neared a close.
"Jim was in a position where he could do something he may have wanted to do for some time," Mr. Kelly said.
There were no other bidders, Mr. Kelly said.
When asked if he had to compete against any other banks for Mercantile, Mr. Rohr said, "You are always competing out there. Always competing."
Mr. Rohr expects jobs to be added in Pittsburgh as a result of the Mercantile transaction, although he would not say how many. PNC currently employs about 7,150 in the region. Jobs also will be eliminated in Mercantile's geographic area, but again, Mr. Rohr does not know how many.
Regardless of what analysts had to say yesterday about the $6 billion purchase price, all hailed PNC's geographic strategy -- even those who were critical of the Riggs purchase a year ago.
Buying Mercantile is " a deal they had to make," said Arnie Danielson, a banking consultant in Rockville, Md.
"I thought the Riggs deal was a poor deal and the only way to make it worthwhile was to buy Merc,'' he said. "It gives (PNC) a powerful position in the Baltimore area similar to Philadelphia and Pittsburgh. They paid a lot for [Mercantile], but I do think now that Riggs makes sense" with the addition of Mercantile.
First Published October 10, 2006 12:00 am