PNC Financial Services ( PNC - Get Report) agreed to acquire struggling National City ( NCC) in a deal worth just under $6 billion. Pittsburgh-based PNC agreed to pay $5.2 billion, or $2.23 a share, for Nat City and will pay $384 million in cash to certain warrant holders. National City shareholders will be entitled to 0.0392 share of PNC common stock for each share of the Cleveland-based bank, the companies said. As part of the deal, PNC said it had been accepted to take part in the U.S. Treasury's $250 billion capital initiative under the troubled asset relief program, or TARP, by selling $7.7 billion of preferred stock and related warrants to the government. PNC estimates its Tier-1 capital ratio will be 10% after the equity injection. PNC figures to be a part of several regional banks that are expected to received preferred equity investments from the government. They will join the likes of large banks including JPMorgan Chase ( JPM - Get Report), Citigroup ( C), Bank of America ( BAC - Get Report), Wells Fargo ( WFC) and others that will receive equity from the government. Other regional banks including KeyCorp ( KEY - Get Report), Fifth Third ( FITB - Get Report), BB&T ( BBT) and Regions Financial ( RF - Get Report) have also said they are considering selling preferred stock to the government. PNC's core deposit base will rise to $180 billion, making the Pittsburgh-based bank the fifth largest in the U.S. by deposit size. "At a time when core funding is key, we see our deposit strength as an important success factor. Upon closing the transaction, we will implement our successful business model and execute our strategies for managing risk, achieving cost efficiencies and growing high-quality revenue streams," PNC Chairman and CEO James Rohr said in a statement. "We believe this strategic combination will continue PNC's efforts to build capital strength and shareholder value. We are also gratified that we have been selected to participate in Treasury's capital purchase program, which has helped to put this transaction on a very solid footing."
The transaction has an estimated internal rate of return to PNC of more than 15% and is expected to be accretive to PNC's earnings in the second year. PNC's fair value adjustments and provisions for future losses of Nat City's current loan portfolio will bring the cumulative impairment of these loans to approximately 17.5%. PNC will continue to liquidate noncore and impaired loans. "The combined company will have greater scale and scope, enhancing service to our customers and communities and providing greater opportunities for our employees," Nat City Chairman and CEO Peter Raskind said in a statement. "This transaction is about two companies that fit well together in terms of geography, products and services." Upon closing the transaction, Raskind will be appointed a PNC vice chairman, the companies said. The price is roughly 19% below Nat City's closing price on Wednesday. Nat City shares were falling nearly 30% as the market opened. PNC shares were flat.