PNC to Expand South with RBC Bank Purchase
PITTSBURGH — PNC announced this week that it has reached a deal to purchase the U.S. arm of Royal Bank of Canada for $3.45 billion, or a $112 million discount on "tangible book value," according to management.
With about $25 billion in assets, including auto loans, Raleigh, N.C.-based RBC Bank has 424 branches in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. When combined with PNC, the new network will have 2,870 branches, ranking fifth among U.S. banks, management pointed out.
"The addition of RBC Bank provides PNC a great opportunity to enter attractive Southeast markets in a way that will create value for our shareholders," said James Rohr, PNC's chairman and chief executive officer.
"The success of our recent acquisitions demonstrates that when we bring our innovative products and services to new markets, we have the proven ability to win clients and take out costs. This transaction represents an outstanding growth opportunity for PNC.
PNC expects the transaction to be accretive to earnings by the end of 2013, or possibly sooner, depending on the amount of the purchase price, if any, paid in the form of PNC common stock.
Under the agreement terms, PNC has the option to deliver to Royal Bank of Canada (Canadian arm) up to $1 billion of the consideration in common stock, or 3 percent of PNC's outstanding common shares based on PNC's closing price of $57.79 on June 17.
Management estimates the transaction will have an estimated internal rate of return in excess of 19 percent. The purchase price is currently estimated at about 97 percent of RBC Bank (U.S.) tangible book value, based on its balance sheet as of April 30 and reflects a negative 0.6 percent deposit premium.
The acquisition will add about $19 billion in deposits and $16 billion in loans to PNC.
"These amounts are net of agreed upon loan and deposit transfers primarily related to certain non-U.S. customers and settlement of Royal Bank of Canada intercompany balances," officials explained.
"The transaction reflects estimated fair value adjustments on RBC Bank (USA) loan portfolio of about $2.2 billion, or 12.5 percent. This includes the losses representing by the existing allowance for loan losses of $755 million as of April 30," officials said.
PNC plans to fund the deal with cash on hand, debt issuance and a preferred stock offering.
Moreover, officials noted that consideration paid in the form of PNC Common stock, if any, will be limited so that Royal Bank of Canada's direct and indirect ownership of PNC common stock does not exceed 4.9 percent of outstanding common shares immediately following the close.
The transaction has been approved by both boards of directors and is expected to close in March 2012, subject to customary closing conditions, including regulatory approvals.
Upon closing, PNC said it intends to merge RBC Bank (U.S.) into PNC Bank N.A. and simultaneously convert RBC Bank (USA) customers to the PNC platform with RBC Bank branches assuming the PNC Bank name.
PNC indicated it expects to retain most of RBC Bank customer-facing employees and sees opportunities to add new positions as it extends its full breadth of retail, corporate, mortgage and wealth management products and services into the acquired markets.
PNC is not acquiring Royal Bank of Canada's other U.S. operations providing capital markets and wealth management services. PNC has agreed to acquire certain credit card assets of RBC Bank, (Georgia) National Association.
Bank of America Merrill Lynch acted as financial adviser to PNC and Wachtell, Lipton, Rosen & Katz was legal counsel. RBC Capital Markets and J.P. Morgan Chase & Co. represented Royal Bank of Canada as financial adviser and Sullivan & Cromwell LLP was legal counsel.
According to Bloomberg, Royal Bank sought to sell RBC Bank a decade after it entered the U.S. with a $2.16 billion takeover of Centura Banks.
Canadian competitors Toronto-Dominion Bank and Bank of Montreal have been growing by buying up troubled U.S. lenders. For example, TD recently acquired Chrysler Financial and went live with its new brand — TD Auto Finance in the U.S.
RBC Bank posted 11 consecutive quarterly losses as of March 31, with combined annual losses of about $3.1 billion since 2007, according to Federal Deposit Insurance Corp. filings. RBC Bank is the smallest of Royal Bank's U.S. operations, which also include wealth management and the RBC Capital Markets investment bank, Bloomberg reported.