PNC Becomes East Coast Giant By Buying Merchant Bankshares

PNC Financial Services Group Inc. said Monday it has agreed to buy Mercantile Bankshares Corp. in a $6 billion stock-and-cash deal that solidifies PNC’s status as a top East Coast bank.PNC is offering 0.4184 share and $16.45 in cash for each Mercantile share, for a value of about $47.24 a share based on Friday’s closing price of PNC stock. That represents a 28% premium to Mercantile’s trading price Friday and is 18% higher than Mercantile’s all-time high of $39.95 reached this past December.Pittsburgh-based PNC said the combined companies will be able to cut more than $100 million in operating expenses by eliminating redundant operational and administrative functions. After eroding earnings per share next year, PNC says the deal will add to profits in 2008 and projects an internal rate of return of 15%.Some on Wall Street suggested that PNC is overpaying for Baltimore-based Mercantile.In addition to the 28% stockprice premium, PNC is paying more than 20 times Mercantile’s long-term earnings and a 41% deposit premium, according to analysts at Stifel Nicolaus. That compares to an average for comparable deals of 18.6 times long-term earnings and a 32% deposit premium.Michael L. Mayo, a Prudential Equity Group analyst, said the deal “destroys” about $850 million in PNC shareholder value, or roughly $2.50 for each PNC share. Investors pounded PNC shares on Monday, sending them down $4.20, or 5.7%, to $69.40. Mercantile’s stock jumped more than 21%,recently trading at $44.51 a share.Like other bank deals this year, this one was characterized by unique circumstances rather than a generalized rush to mergers in the sector. The acquisition was made possible by PNC’s recent sale of its stake in money manager BlackRock Inc., which created a deep pool of capital that PNC tapped to finance the generous Mercantile premium.

PNC Becomes East Coast Giant By Buying Merchant Bankshares

PNC Becomes East Coast Giant By Buying Merchant Bankshares

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