By Dan Wilchins and Joseph A. Giannone
NEW YORK (Reuters) - PNC Financial Services Group Inc
The transaction is the first to occur since government officials signaled earlier this week that they would approve of banks using a government capital infusion to acquire weaker rivals.
PNC said it expects some $20 billion of writedowns from National City's loans, losses that dwarf the accounting value of the entire Cleveland-based bank. National City said earlier this week that as of August 31 the company was worth $17.2 billion, based on shareholder equity on its balance sheet.
"That's why you've been seeing financial institutions get pounded this year -- because no one knows what their assets are worth," said Steve Persky, chief executive of Dalton Investments in Los Angeles.
National City has been walloped by declining mortgage values, in part from home loans it retained when it sold subprime lender First Franklin Financial Corp to Merrill Lynch & Co Inc
National City would join Bear Stearns Cos, Merrill Lynch, Sovereign Bancorp Inc
PNC said its offer valued National City at $2.23 a share, roughly 19 percent below the Thursday closing price. Pittsburgh's PNC will pay 0.0392 share for each National City share plus $384 million in cash to certain warrant holders.
In tandem with this deal, PNC plans to sell $7.7 billion of preferred shares and warrants to the U.S. Treasury under the Troubled Assets Relief Program, making it the first regional bank to participate in the program.
The government said last week it was injecting $125 billion into nine large U.S. banks using funds from the TARP, and planned to give another $125 billion to other banks.
A senior government regulatory official said on Monday that merger opportunities will be among the factors the Treasury will consider in deciding which banks get government investments.
News of the deal sent PNC shares up 3.8 percent, or $2.15, to $59.03, even as financial markets swooned amid renewed fear that the global economic slowdown could get worse. National City stock dropped 24 percent, or 66 cents, to $2.08, about 23 cents below the current value of PNC's offer.
Stock of another hard-hit Ohio bank, Fifth Third Bancorp
For months regulators have been pressuring a weakened National City to sell itself. In April, National City sold a 7.8 percent stake to private equity firm Corsair Capital and other investors for $7 billion, but the infusion was not enough to save it.
BIG WRITEDOWNS SEEN
PNC said the deal, to be completed by the end of this year, would generate a 15 percent rate of return and boost per-share results in its second year. The bank will incur $2.3 billion of merger costs and $1.2 billion of other expenses.
National City branches will assume the PNC name. The company headquarters will remain in Pittsburgh.
During a conference call Friday, PNC Chief Executive James Rohr told analysts the bank expects to record $19.9 billion in writedowns on National City loans. PNC may also consider issuing $1 billion of common equity "in the foreseeable future," but only after speaking with top shareholders.
National City posted a $729 million quarterly loss earlier this week. Its chief executive, Peter Raskind, told Reuters on Tuesday that the economic environment "probably gets worse before it gets better."
On a conference call with investors, Raskind said, "While fully recognizing the challenges that we face, we believe we will emerge from this difficult environment as a much stronger organization."
Raskind will join the combined bank's board, along with one other National City director.
PNC's Rohr said Treasury's offer to inject capital made the deal for National City attractive. With the new funds, the combined company's Tier 1 capital ratio would be a healthy 10 percent.
PNC faced competition for National City, Rohr said, adding that the bank had considered a deal with National City for quite some time, he said. He declined to say whether Treasury forced PNC to acquire its weaker rival.
Typically bank mergers trigger antitrust provisions that require branch and business sales, but Rohr said concentration issues exist in less than 3 percent of the combined deposit base. Currently, the two banks combined have $180 billion in deposits.
Citigroup, JPMorgan Chase & Co, and Sandler O'Neill advised PNC, while Goldman Sachs advised National City.
Jones Day and Sullivan & Cromwell were legal advisers to National City. Wachtell, Lipton, Rosen & Katz advised PNC.
(Editing by Gerald E. McCormick, Derek Caney, Jeffrey Benkoe and Steve Orlofsky)
