Shopping Ideas for PNC (NYSE: PNC)

NEW YORK - PNC the 6th largest bank in the United States has apparently been looking to acquire a bank which does business in Florida. Possible names include : Regions Financial and BankAtlantic. PNC Financial shares have lost nearly 2% on the news but one has to wonder why. A purchase of Bank Atlantic would be so insignificant that it should not be treated as a positive or a negative but it would be more of a positive. A purchase of Regions Financial could be tremendous, and if there was no purchase then it would not be negative either. Investors are using the uncertainty of the rumor and trying to mislead investors into saying that an acquisition is a bad idea.

Here is how PNC can easily complete the merger with Regions Financial the 12th largest bank in the U.S. by assets. PNC should not pay more than $8 or $9 billion for Regions given its large amount of problems. PNC should prepare a $4 billion share issue if there was a merger. Perhaps the worst part of the deal is PNC having to raise funds by issuing their undervalued currency. By PNC issuing stock at its current discounted rate it may lose a lot of return. The second part of the purchase should come with the disposition of its BlackRock stake. Which is worth $10 billion but is only shown for $6 billion on the balance sheet. This would make sure the company can easily maintain top tier 1 ratios. As due to accounting chicanery the selling of BlackRock will magically add $4 billion to their Tier 1 ratio without changing the companies actual position. The bank should of course buy Regions with stock and cash and immediately pay off Regions TARP money.

If PNC purchased Regions at $8 billion, the fair value of Regions net tangible assets less tarp funds is likely around 0. This is calculated by, Regions currently has $17 billion of equity, but they have $5 billion of goodwill, $440 million of intangibles and $3.3 million of Tarp funds this leaves tangible equity at $8.6 billion. It is likely PNC will charge off $8 billion at least of RF's assets given its problems and the fair values of RF's loan portfolio is greatly overstated on its balance sheet. This means that PNC would be buying a bank for roughly 6 times 2007 earnings. The acquisition would be very beneficial in a couple of years and would cement the PNC brand.

In short if there is a merger or no merger the stock should not be reacting negatively to the news.