Talks between Riggs National Corp. and PNC Financial Services Group Inc. to save their $766 million merger acrimoniously collapsed, and Riggs yesterday accused the Pittsburgh bank in court of trying to "virtually steal" the Washington institution.
The split puts Riggs in limbo for now. Officials there said they will try to sell the scandal-plagued bank to another suitor. But the final price is likely to be lower than the $24.25 a share PNC originally offered in July and ultimately withdrew after Riggs pleaded guilty last month to a felony for failing to report possible money laundering.
The District-based bank broke off negotiations and sued yesterday after PNC offered less than $21 a share and changed other terms. PNC said Riggs's business had been so damaged by the scandal that it was not worth the original offer. The PNC deal had been seen as a way to salvage Riggs's reputation and keep its operations focused on lending to Washington area residents.
Depositors and customers with loans from Riggs are not immediately affected by the deal's demise. But the bank's regulators have criticized its management, and unless a new buyer steps in, the bank will remain the subject of intense government oversight that could limit its ability to expand and provide certain services.
The suit Riggs filed yesterday in D.C. Superior Court surprised PNC officials. It seeks unspecified damages or enforcement of the original merger terms. "We are not going to undertake any transaction that does not reflect the proper value for Riggs," said Riggs spokesman Mark N. Hendrix.
PNC's latest offer would have cut the purchase price to $20.15 and given it the option to reduce the price even further. PNC also wanted Riggs to settle certain civil litigation before the sale was completed, something Riggs's board unanimously rejected.
"This has the appearance of Riggs being the bride in white at the altar and the groom not showing up," said Gary Townsend, a bank analyst at Friedman, Billings, Ramsey & Co. "And you have a very angry bride here. . . . It seems to me PNC was reaching for reasons not to do the deal."
PNC said that its offer for Riggs is fair and that it continues to want to work on the deal.
In a statement, PNC called the Riggs lawsuit "precipitous." It said, "It is our hope that the Riggs Board will drop this unfortunate tactic" and negotiate a new deal.
In recent negotiations, PNC asserted that Riggs's legal troubles, including the guilty plea for failing to take anti-money-laundering measures and a $16 million fine, amounted to a "material adverse change" in Riggs, allowing PNC to pull out of the deal. In the guilty plea, Riggs admitted it had failed to file required reports on suspicious transactions by former Chilean dictator Augusto Pinochet and the West African country of Equatorial Guinea.
The PNC statement said Riggs has experienced "an exorbitant run rate of legal and compliance expenses related to a litany of legal and regulatory matters that Riggs continues to face, along with other losses. The business and results of operations at Riggs have also suffered significant deterioration."
Hendrix disputed that assertion, saying, "There has not been a significant deterioration in Riggs's core banking franchise." He cited Riggs's lawsuit, which contends Riggs's retail banking network remains healthy and is performing better than was projected when PNC first agreed to the merger.
Riggs said yesterday it is committed to seeking a merger with a larger bank, if not with PNC. Four other potential buyers expressed interest in Riggs last spring before it struck a deal with PNC, including one buyer that offered an all-stock deal worth 97 cents a share more than PNC's offer. Riggs took the PNC offer because it was half in cash, PNC's stock was less volatile and PNC expressed its commitment to getting the deal closed despite Riggs's regulatory troubles, according to securities filings.
Townsend said Sovereign Bancorp Inc. in Pennsylvania; M&T Bank Corp. in Buffalo, N.Y., which owns a large, Baltimore-based operation and has branches in the Washington area; and National City Corp. in Cleveland could all make offers for Riggs.
At the July 16 news conference announcing the merger, PNC chief executive James E. Rohr called Washington "one of the most appealing, if not the most appealing, market in the entire nation." Rohr also bragged about PNC's due diligence, claiming the company had 90 people go over Riggs's books and assess its potential legal liabilities. PNC had "a good understanding of the issues" at Riggs, Rohr said then.
A condition of the deal was that Riggs would clear up any pending regulatory or criminal matters before the sale closed and would get out of the international and embassy businesses at the root of its anti-money-laundering problems. Riggs says it has done both.
The deal began to run into trouble in December, according to the Riggs lawsuit. On the first of that month, PNC's lawyers at the Wall Street merger-and-acquisition firm Wachtell, Lipton, Rosen & Katz told Riggs that PNC wanted a "comprehensive settlement" with Justice and on all outstanding regulatory issues as a condition for proceeding with the merger. At PNC's urging, Riggs pursued a guilty plea and negotiated a clause in which the five-year probationary period would end when Riggs was sold to PNC, the lawsuit alleges.
But in late January, PNC declined to give its final consent to Riggs's guilty plea unless Riggs agreed to renegotiate the price and waive its rights to enforce a deal if those negotiations failed. PNC asserted that the plea agreement amounted to a material adverse event, allowing PNC to pull out of the deal if it chose to. Riggs pleaded guilty on Jan. 27.
That day, in a last-ditch effort to save the deal, Riggs agreed to a nine-day negotiating period during which the two sides would try to come up with a new, lower price for Riggs.
PNC's first offer during that negotiating period, on Feb. 2, was so low that Riggs concluded it was trying to coerce Riggs into allowing PNC to "steal" the bank, the suit said. PNC's initial offer was $15.63 a share, more than 35 percent lower than the $24.25 a share agreed to in July. At the time, Riggs was trading at $22 a share on the Nasdaq Stock Market.
Sources with knowledge of the negotiations said PNC also wanted Riggs to settle a civil lawsuit filed by survivors of the Sept. 11, 2001, attacks, who allege that some of the hijackers' money may have had its source in a Riggs checking account held by the wife of the Saudi ambassador to the United States. PNC also wanted Riggs to set aside reserves to cover lawsuits filed by Riggs shareholders. Riggs says neither of the two actions has merit and wouldn't agree to the new terms, said the sources, who would speak only on the condition of anonymity because of the litigation.
Riggs's stock closed yesterday at $19.85, down $1.40. PNC's stock closed at $54.58, up 38 cents.
Riggs also said yesterday that it lost about $60 million in the fourth quarter. For all of 2004, its loss is expected to total about $100 million. The fourth-quarter results included $20 million in expenses associated with the criminal settlement. The bank also set aside $8 million in reserves to cover the costs of civil litigation.