With a self-imposed deadline for an announcement drawing near, investors and analysts are acting convinced that PNC Financial Services Group Inc. will negotiate a lower price for Riggs National Corp.
The embattled Washington company, which last week agreed to pay a $16 million fine to the Justice Department and plead guilty to a criminal count of failing to file a suspicious-activity report, said it expected to make an announcement "on or about" Feb. 4 about its deal to sell itself to PNC.
Riggs has been under regulatory scrutiny for over a year for lax anti-laundering controls and alleged violations of the Bank Secrecy Act.
Analysts said the regulatory troubles - some details of which surfaced after PNC, of Pittsburgh, agreed in July to buy Riggs - along with deposit runoff in the Washington market could persuade PNC to use the deal's "material adverse change" clause to either walk away or renegotiate.
A renegotiation is widely expected. PNC originally agreed to pay $24.75 a share, or about $779 million. Riggs' stock is trading at just over $21; that price indicates investor sentiment that the new deal price will be at least $2 a share lower, or about $665 million.
"Now that they have a clear view of what's going on there, … [PNC is] making noises that it's a material change," said Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. Inc. "It seems to me the fair price is more like $20 to $22 a share."
Last week's settlement and fine were seen as smoothing the road for PNC to close the deal.
Riggs has also advanced its efforts to shed business lines. Bank Leumi le-Israel Ltd. said Sunday that its British unit, Bank Leumi PLC, had agreed to buy Riggs Bank and Trust Co. of the Channel Islands for $25 million. Bank Leumi also agreed to buy deposits and portfolios of Riggs' London branch.
The deal included $120 million of deposits and investments, a $165 million credit portfolio, and a $430 million portfolio of trusts, mostly from the Channel Islands unit.
PNC executives, while pointing out that they could walk away from the deal if they had to, have repeatedly said in the last few months that they were going to wait and see how the regulatory issues would be resolved.
William S. Demchak, PNC's chief financial officer, told investors at a conference Jan. 26 that it was in daily contact with Riggs executives. "We continue to plan our merger integration. We're going to wait and see, as you are, to see how they'll work their way through their issues."
Analysts said it would be worse for PNC to walk away at this point than to muddle through.
"If cool heads preside in negotiations, some sort of agreement will be reached so it doesn't look entirely embarrassing to PNC to buy a company that has gone from an ugly duckling to a pariah," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, who covers both companies. "But everyone wants … [the deal] to go through."
One of the biggest remaining questions is about the severity of the Washington deposit runoff - the whole point of the deal was to get PNC into this attractive and growing market. Riggs agreed to exit its embassy banking business last year, so third-quarter deposit figures filed with the Federal Deposit Insurance Corp. masked the actual runoff in nonembassy business.
Deposits held in domestic offices at Riggs Bank fell 16% from June 30 to Sept. 30, to $3.65 billion, according to FDIC data. Deposits by individuals, partnerships, and corporations fell 16%, to $3.59 billion, and deposits from foreign governments and official institutions fell by more than half, to $42 million.
Riggs has yet to file its fourth-quarter report, but analysts say there is anecdotal evidence that core deposits from nonembassy customers have declined.
Neither PNC nor Riggs would comment on Wednesday.
It would not be the first time a deal was renegotiated. In 1999, HSBC Holdings PLC put its plans to buy Republic New York Corp. on hold after one of Republic's biggest customers, the New Jersey fund manager Martin Armstrong, was accused of misleading Japanese investors.
HSBC had originally agreed to pay $72 a share, or about $10.3 billion, for Republic. But Edmund Safra, Republic's eccentric founder and chairman and one of its major stakeholders, cut the amount of money he would personally receive for his 29% stake by nearly half a billion dollars, to $2.75 billion, to get the deal through.
The Allbritton family have a substantial stake in Riggs. Its former chairman and chief executive, Joe L. Allbritton, personally owned about 36%, or 10.9 million shares, as of August. At the deal's current price, his stake would be worth nearly $270 million.
Would he lower his personal take? "I doubt we will see that kind of charity," Mr. Townsend said.
