Late last summer, in the weeks after PNC Financial Services Group Inc. struck its deal to buy Riggs National Corp., investors learned in a securities filing that another company had actually outbid PNC in the auction for Riggs.
Whichever bank that was - the filing did not identify it - will presumably get a second chance. Riggs announced Monday that it had rejected PNC's proposal to sharply reduce the deal price, and that it would seek a merger with another large financial institution.
The board of the Washington banking company said it had summarily rejected a price of $19.32 a share from PNC, plus another 83 cents a share in contingent security and a host of other demands PNC had made. Assuming the contingency payment were made, that would be a 19% discount from the original deal.
Riggs also said it would sue PNC for damages.
The announcement ended months of speculation about whether the deal would ever get done. PNC, of Pittsburgh, was widely expected to seek lower terms for its $779 million deal for the embattled Riggs, and most observers have said they thought a compromise was within reach.
PNC's agreement with Riggs included a material-adverse-change clause allowing it to walk away from the merger. Executives had reminded investors and others about the clause in meetings throughout the fall, after a number of revelations about Riggs surfaced, including possible ties to corrupt foreign governments.
Though the collapse of a deal is rarely something a company looks back on favorably, analysts said PNC may have emerged the better for it. Thomas Monaco of Moors & Cabot said this "takes quite a degree of uncertainty away from PNC, including the unquantified legal risks lurking at Riggs."
Gerard Cassidy of Royal Bank of Canada's RBC Capital Markets also said it was a "mild" positive for PNC. He said he expects it to continue building branches and making acquisitions in contiguous markets, possibly in New Jersey, eastern Pennsylvania, or the New York metropolitan area.
A PNC spokesman did not return a call seeking comment.
For Riggs, the situation is obviously much less clear. Mr. Cassidy said he was not convinced that Riggs would find another buyer. If one does emerge, he said, it is doubtful it will substantially top PNC's last offer, and it will require protections similar to those PNC sought. Last week, along with seeking a lower price, PNC attempted to shield itself from post-merger liability by demanding that Riggs settle or reserve against future civil litigation.
"I'd say there's a better than 50-50 chance that Riggs remains independent," Mr. Cassidy said.
The Washington company's board of directors said in a statement issued Monday: "PNC knew that its revised terms and conditions would be unacceptable to Riggs. In addition to the price, we are particularly disturbed by PNC's new insistence that Riggs settle or reserve against private litigation as a condition of closing, even though we believe these claims are without merit."
The board said it "continues to believe that the interests of its shareholders and other constituencies will be best served by a combination with a larger institution, and Riggs will continue to pursue this strategic goal."
Mark Hendrix, a spokesman for Riggs, added, "We are not going to undertake any transaction that does not reflect the proper value of Riggs and would not be in the best interests of the institution or its shareholders." He would not say whether any new bidders had stepped forward or how long Riggs expects to take to find a new buyer.
Riggs' problems have taken a toll on its financials. The company has yet to release its fourth-quarter and yearend earnings statements, which it says it is still finalizing. It did say Monday that it would lose $60 million for the quarter and $100 million for the year. If it were forced to remain independent, sources said, it would probably seek a capital injection and changes to its management team.
Three finalists were in the running last summer to buy Riggs, which started exploring strategic options in the spring with the assistance of Lehman Brothers. According to a Securities and Exchange Commission filing in August, 14 buyers expressed interest in the $6 billion-asset bank.
Sovereign Bancorp of Philadelphia, M&T Bank Corp. of Buffalo, National City Corp. of Cleveland, and Mercantile Bankshares of Baltimore were all said to have been in the running.
Sovereign shares dropped 1.81% Monday.
Shares of M&T fell 0.02% Monday. Last month the company raised eyebrows by filing a $3 billion mixed shelf registration, the proceeds of which it said could go to a number of corporate purposes, including acquisitions. A spokesman declined to comment.
Shares of National City, which is eager to expand outside its core Ohio markets, rose 0.94%. A spokeswoman declined to comment Monday about Riggs but did reiterate that National City is looking at acquisition opportunities.
Mercantile's shares gained 0.29% Monday. A spokesman declined to comment.
Observers said few bidders would have had the stomach to take on the regulatory problems at Riggs, which has been under investigation by the Office of the Comptroller of the Currency, the Treasury Department, and the Justice Department for its failure to comply with strict anti-money-laundering laws and the Bank Secrecy Act. It paid $25 million to the OCC and Treasury last May and another $16 million to Justice last month.
Riggs had already agreed to discontinue its international and embassy banking operations - where the regulatory problems surfaced - before the PNC deal was struck. PNC was essentially buying Riggs' retail banking businesses in and around the Washington area.
It appears that PNC began to sour on the deal after additional information came out in the fall linking Riggs and its senior executives to the former Chilean dictator Augusto Pinochet and a number of other scandals.
According to Riggs' lawsuit, filed Monday in D.C. Superior Court, PNC's lawyers told Riggs that PNC wanted to see a comprehensive settlement with the Justice Department, the Federal Reserve, and the OCC on all outstanding issues, and that a settlement with Justice involving a guilty plea would be preferable to a deferred prosecution or other arrangement.
Riggs says it pursued a settlement with Justice, announcing a guilty plea Jan. 27 and a fine of $16 million. But it says in the lawsuit that PNC balked on Jan. 19, saying it would withhold its consent to the plea agreement Riggs had reached with the Justice Department unless Riggs agreed to waive its rights under the merger agreement by conceding that a material adverse event had occurred entitling PNC to walk away from the deal.
Riggs said it would not waive its rights, but it agreed to renegotiate the deal price. The lawsuit says that during the week of Jan. 31, PNC "unequivocally and repeatedly" said it would not abide by the terms of the merger agreement.
The lawsuit accuses PNC of trying to "steal" Riggs by demanding a cut-rate price of between $15.20 and $17.70 a share plus a contingent payment of no more than $3.33 a share. The July agreement called for a price of $24.75 a share.
Shares of Riggs fell 6.59% Monday. PNC's rose 0.70%.
