PNC goes to Washington in Mercantile deal

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PNC Financial of Pittsburgh on Monday said it would buy Mercantile Bankshares for about $6bn in cash and stock.

The move allows PNC to extend its reach into the lucrative east coast banking market, especially the fast growing and affluent Washington DC metropolitan area.

The deal sets up PNC as a strong regional player better able to compete with national banks such as JPMorgan Chase, Citigroup, Bank of America and Wachovia.

PNC’s offer of $47.24 in stock and cash represents a 28 per cent premium over Baltimore-based Mercantile’s closing price on Friday of $36.78.

PNC shares dropped 6 per cent to $69.18 in midday New York trading. Mercantile shares soared 21 per cent to $44.52.

Analysts said PNC’s drop was based in part on confusion about when and how much the deal would add to PNC’s earnings.

PNC said the acquisition would add to earnings in 2008 and would have an internal rate of return of about 15 per cent. PNC said the deal would lead to $100m in operating expense reductions.

However, Gary Townsend, analyst at Friedman, Billings, Ramsey, said that in their presentation PNC executives estimated that Mercantile’s profit for 2007 would be $280m. Mr Townsend said he had been estimating $318m for 2007.

“They did not present the numbers well and it’s unfortunate because it creates confusion,” Mr Townsend said.

Nonetheless, Mr Townsend said the deal would establish PNC as a major player in Washington and the surrounding suburbs in Maryland and Virginia.

Mercantile has 240 branches concentrated in Maryland with additional locations in Virginia, Washington, Delaware and south eastern Pennsylvania.

PNC said the deal would make it a top 10 US bank by market capitalisation and the 11th biggest by deposits.

The deal comes after PNC paid $800m in 2004 to acquire Riggs National of Washington.

PNC also recently combined its 70 per cent stake in investment manager BlackRock with the investment management division of Merrill Lynch.

PNC recorded a gain of $1.6bn on the BlackRock deal. PNC chief executive James Rohr has said the bank could use the gain to fund acquisitions.

Prudential Equity Group analyst Michael Mayo downgraded PNC from neutral to the equivalent of sell, saying he believed the deal would destroy $850m in value.

Under the terms of the deal, which has been approved by both boards, Mercantile shareholders will receive 0.4184 shares of PNC and $16.45 in cash.

Citigroup, Goldman Sachs and law firm Wachtell, Lipton, Rosen & Katz advised PNC. Sandler O’Neill and law firms Davis Polk & Wardell and Venable advised Mercantile.

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