PNC Financial to use debt, preferreds to buy RBC's U.S. subsidiary

By Jennifer Lanning Drey

Savannah, Ga., June 20 - PNC Financial Services Group Inc. has signed a definitive agreement to buy Royal Bank of Canada's U.S. retail banking subsidiary in a $3.45 billion transaction that PNC plans to fund with cash, debt issuance and stock, James Rohr, PNC's chief executive officer, said during a Monday conference call held to discuss the transaction.

"Our assumption is that the transaction will be financed with cash on hand, debt, preferred stock and maybe some common [stock]," Rohr said.

The purchase price is subject to a price adjustment at close for the actual net tangible asset value delivered.

Under the terms of the agreement, PNC has the option of paying RBC up to $1 billion in common stock. The amount of common stock issued is likely to depend on the amount of capital necessary for PNC to meet regulatory capital requirements at the time of closing, Rohr said.

When asked during the question-and-answer portion of the call about what will drive the division between debt and preferred stock, Rohr noted that under Basel III rules, much of the preferred shares that PNC currently has outstanding will no longer count as tier 1 capital over time.

"So this is a great opportunity for us to start building the preferred stock base of the company through this acquisition rather than issuing more common [stock] because, quite frankly, our common ratios are very strong," he said.

The CEO later said the option of paying RBC up to $1 billion in common stock was added in an effort by PNC to have a capital structure that looks consistent with where PNC's capital structure is today, knowing that it needs to gain regulatory approval.

"Overall, we believe the pro forma balance sheet of our two companies will remain strong and well positioned," Rohr said during his formal remarks.

Growth opportunity

The transaction is compelling to PNC because it provides a substantial growth opportunity for the company by bringing its products and services to RBC Bank (USA)'s markets, Rohr also said during the call.

"This acquisition extends our geographic reach and enhances our distribution in several key growth markets at an attractive price," he said.

With $25 billion of assets, RBC Bank (USA) has 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina.

The transaction is also attractive for PNC because the company will pay less than tangible book value and has projections built into the agreement on the closing asset value.

"These terms will allow us to make appropriate investments to drive further growth in these new markets," he said.

Financially sound

Also from a financial perspective, Rohr said the transaction is expected to be accretive to earnings by the end of 2013 or sooner depending on the amount, if any, of the purchase price paid in the form of PNC common stock.

On the credit side, Rohr noted that PNC has reviewed RBC's loan portfolio and plans to take appropriate marks, which should result in lower provision costs going forward.

"Our experience handling distressed assets following our acquisition of National City gives us confidence in our marks, along with our ability to liquidate these loans in a value-added manner," he said.

PNC plans to incur merger-and-integration costs of $322 million and achieve a reduction of $230 million of RBC Bank (USA) non-interest expense through operational and administrative efficiency improvements.

The transaction is expected to close in March 2012, subject to customary closing conditions including regulatory approvals. The boards of directors of both companies have approved the transaction.

Based in Raleigh, N.C., RBC Bank (USA) is a subsidiary of Royal Bank of Canada.

PNC is a financial services company based in Pittsburgh.

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