PNC to buy ailing National City for $5.6 billion

PNC Financial Services Group Inc agreed to buy ailing National City Corp in a government-backed $5.6 billion deal that will rescue the Ohio-based lender and create the No. 5 US bank by deposits.

National City has been hurt by the falling value of home loans it held after selling subprime lender First Franklin Financial Corp to Merrill Lynch & Co Inc in late 2006. Acquisitions of two Florida banks in 2006 and early 2007 added to its woes as housing markets there crumbled.

National City would join Bear Stearns Cos, Merrill Lynch, Sovereign Bancorp Inc, Wachovia Corp and Washington Mutual Inc

among US financial companies that have been or are being swallowed up by lenders considered healthier.

Those forces weakened National City and sent its shares down 86 per cent this year.

PNC said its offer valued National City at $2.23 a share, roughly 19 per cent 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.

To make the deal more palatable to its own shareholders, PNC plans to sell $7.7 billion of preferred shares and warrants to the US Treasury under the Troubled Assets Relief Program (TARP), making it the first regional bank to participate in the program.

News of the deal sent PNC shares up 5.5 per cent, or $3.11, to $59.99, even as financial markets swooned amid renewed fear that the global economic slowdown could get worse. National City stock dropped 20 per cent, or 54 cents, to $2.21, about a nickel below the current value of PNC's offer.

Stock of another hard-hit Ohio bank, Fifth Third Bancorp, sank 22 per cent on disappointment it was not the acquisition target.

Regulators have been pressuring a weakened National City to sell itself for months. In April, National City sold a 7.8 per cent stake to private equity firm Corsair Capital and other investors for $7 billion, but the infusion was not enough to save it.

PNC projects that the deal, to be completed by the end of this year, would generate a 15 per cent rate of return and boost per-share results in its second year. The bank will incur $2.3 billion in merger costs and $1.2 billion in 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 write-downs on National City loans. PNC may also consider issuing $1 billion in 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."

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 per cent.

PNC faced competition for National City, Rohr said, adding that the bank had scrutinized 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 per cent 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.