PNC Deal Stands Out

The bank is paying a hefty premium for Mercantile.
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PNC Financial's

(PNC) - Get Report

$6 billion bid for

Mercantile Bankshares

(MRBK) - Get Report

isn't likely to spark a wave of bank mergers and acquisitions.

Observers say it's unlikely that more big deals will follow without stock valuations coming down first. It's a good bet the banking sector will remain an onlooker to the record number corporate mergers and leveraged buyouts taking place in other industries.

The Pittsburgh-based bank is paying $47.24 a share for the Baltimore-area lender, which has $17 billion in assets and 240 branches primarily in Maryland and Washington D.C. The deal, which will give PNC more than 1,000 branches on the East Coast, is the fourth-largest bank merger this year.

But it's also one of the costliest. PNC is paying a 28% premium, well above the average 23.2% premium for bank deals this year, according to Dealogic.

Early on, it looked like it would be a banner year for bank M&A.

In March,

Capital One Financial

(COF) - Get Report

, the McLean, Va., credit card firm, announced it would pay $14.8 billion for New York's

North Fork Bancorp


. Two months later, a pair of large deals emerged just weeks apart --


(WB) - Get Report

$25.2 billion acquisition of

Golden West Financial


Regions Financial's

(RF) - Get Report

merger with

AmSouth Bancorp


for $9.9 billion.

But since then, it's been something of a merger dry spell for banks. Aside from the four big deals, the majority of the 42 transactions announced this year have been valued at $3 billion or less, according to data from Dealogic.

To watch Laurie Kulikowski's discussion with Farnoosh Torabi about the PNC-MRBK deal, please click here


Observers and bank executives have been saying for the past two years that in order to see a pickup in large bank acquisitions, price-to-earnings multiples at mid-cap banks will have to come down.

"Larger banks are trading at a discount" to smaller banks, says Jennifer Thompson, an Oppenheimer analyst. "It's hard to make deals work when that is the care."

Thompson says bank M&A will pick up as lenders run into trouble "generating strong organic growth'' and past loans they've made begin souring. But, she adds, most of those deals will be smaller ones.

Another reason the PNC deal isn't likely to spark new mergers is the hefty 28% premium it's paying for Mercantile, based on a $36.78 Friday closing share price.

Citizens Banking


of Flint, Mich., is paying the largest premium this year. Its $1 billion deal to buy

Republic Bancorp

(RBNC) - Get Report

of Ann Arbor, Mich., represents a 31% premium.

Wachovia, meanwhile, paid a more modest 15% premium for Golden West. The deal for the Oakland, Calif., mortgage lender closed last week. Capital One's 22.7% premium was in line with the average bank deal.

Jim Rohr, PNC's chairman and CEO, makes no qualms about paying the price for Mercantile's attractive noninterest-bearing deposits and wealth-management business. But Rohr has got a lot of capital to get rid of these days.

The Mercantile acquisition comes shortly after the closing of a $10 billion deal between

Merrill Lynch


and PNC to merge some of the asset-management operations. PNC, prior to that deal, had been a majority shareholder of


(BLK) - Get Report

, and the transaction boosted the value of its shares.

Mercantile is a "remarkably good fit for PNC geographically as well as culturally," according to Rohr on a conference call Monday morning. "As a merger partner, clearly Mercantile is highly sought after. Our philosophies, clients and risk

are almost identical." He expects the deal to become accretive to PNC's earnings in 2008.

PNC is also no stranger to Mercantile's market. Last May it acquired scandal-tarred

Riggs National

, another Washington-area bank.

But Thompson cautions that the deal, which is not expected to close until sometime in the first quarter of 2007, does not come without risks.

PNC is assuming cost savings of about $100 million from the deal, or 25% of Mercantile's expense base, which are "a little aggressive," Thompson says. Mercantile already operates a fairly lean franchise, and PNC does not plan to close many Mercantile branches, she adds.

Mercantile's stock is up $8.09, or 22%, to $44.87 on Monday. Shares of PNC fell 4.84% or $3.56, to $70.04.