PNC to buy Corsair-backed National City for $5.2bn

Corsair Capital will be made whole on its investment in National City because of an anti-dilution provision, according to a source. The US Treasury will take a $7.7bn stake in the combined entity.

US bank PNC Financial Services Group has agreed to acquire Corsair Capital-backed bank National City for $5.2 billion in a deal in which the US Treasury will take a $7.7 billion stake in the combined entity.

PNC plans to issue to the US Treasury $7.7 billion of preferred stock and related warrants under the Troubled Asset Relief Program's Capital Purchase Program, the portion of the so-called US “bailout bill” recently earmarked for equity investment in US banks.

Corsair Capital, which led a $985 million investment in National City in April, will be made whole on its investment because of a so-called reset clause included in the original investment agreement, according to a source familiar with the transaction.

In a statement, the firm said that “Corsair supports the proposed [National City] transaction with PNC. Corsair believes that in light of today's environment surrounding the banking industry, the decision by the [National City] board to enter into the proposed transaction with PNC is appropriate. PNC is uniquely situated to emerge as one of a handful of leading players in the U.S. banking sector”.

The financial services-focused firm owns roughly 7.8 percent of outstanding National City common shares, as well as warrants for more. Corsair declined to comment beyond the statement.

In a shareholder call this morning, PNC chief executive James Rohr said that he did not know whether the US government forced National City to make a deal, but that PNC did participate in a “competitive bid” process.

Pittsburgh-based PNC will pay $2.23 per share for the Cleveland, Ohio-based savings and loan, and an additional $384 million to certain undisclosed warrant holders. National City shareholders will be entitled to 0.0392 share of PNC common stock for each share of National City in the stock swap, according to a statement from PNC.

The transaction is expected to close by 31 December, but is subject both to PNC and National City shareholder approval.

The $2.23 price tag is less than half of what Corsair paid in April when it purchased 20,000 shares of National City for $5. In that agreement, Corsair also received a warrant to purchase roughly 39 million shares of National City stock at a strike price of $7.10 per share, according to Securities and Exchange Commission filings.

It was unclear at press time whether all or part of the $384 million designated for warrant holders would be paid to Corsair.

The Ontario Teachers’ Pension Plan and Michael Dell’s private family wealth office were also members of the consortium that invested in National City in April. Since that date, the bank has seen its market capitalisation shrink significantly as the public markets continue to batter financial services.

Private equity giant TPG removed its reset provision from its investment in now-defunct savings and loan Washington Mutual as the bank struggled to find potential bidders and ended up losing a reported $1.3 billion on its $2 billion investment in the deal.