Lawyers and investment bankers for PNC Financial Services Group Inc. and Riggs National Corp. have spent the past two days trading both numbers and arguments in an effort to reach a new, lower sale price for Riggs, according to sources.
One source familiar with the process likened it to a purchaser of a house who discovers structural problems before the final closing. "The buyer still really wants the house, but he wants to make sure the new facts are reflected in a new price," said the source, who spoke only on condition of anonymity because the outcome of the negotiations is still unclear.
PNC offered $24.25 a share, or about $766 million, for Riggs on July 16. Since then, however, a criminal investigation led to a $16 million fine and a felony guilty plea by Riggs last week for failing to file reports designed to deter money laundering. The fine and the many millions of dollars spent on lawyers and consultants to deal with the investigation, and on cleaning up and getting out of Riggs's international and embassy banking businesses at the heart of the scandal, have damaged Riggs's business.
Sources said PNC doesn't think Riggs is worth $24.25 a share anymore.
For instance, in the three-month period ended Sept. 30, Riggs spent more than $13 million on legal fees, or about 41 cents a share, according to its most recent quarterly statement with the Securities and Exchange Commission. That kind of spending on Riggs's armada of lawyers no doubt continued through the first quarter, when it reached the plea agreement with federal prosecutors.
In addition to direct costs associated with the criminal litigation, said one source familiar with the discussions, there is the potential for further costs to defend the company and possibly cover the legal fees of directors or officers in shareholder and class-action lawsuits that have already been filed.
"It's a much more complicated story than just the fines," the source said. "And you have to take a careful look at the financial deterioration [of Riggs] in the last six months. It has to come out of someone's pocket."
Several individuals familiar with the talks said they believed it was likely the two companies would reach an agreement on a new price. They cautioned, however, that no final agreement has been reached. The two companies hope to announce something about the status of the merger on Friday, but two sources said negotiations could go into next week or beyond. The deadline for completing the merger is April 30, and work integrating the two companies' computer systems, not to mention shareholder votes on the deal, has yet to be completed.
Wall Street is already signaling what investors think the final price will be: about $22 a share, or about $700 million. Riggs closed at $22.01 yesterday, up 17 cents.
Spokesmen for Riggs and PNC declined to comment.
Gary Townsend, who follows Riggs for Friedman, Billings, Ramsey & Co., estimated that the final price would be $20 to $22 a share. "But frankly, that's guesswork," he said, because Riggs's fourth-quarter financials, which would detail things such as the stability of its deposit base and the dollar amount of its legal fees, will not be released until March.
If PNC were to hold the line at $20 a share -- more than $4 less than what was originally offered and $2 less than what a stockholder could sell a share for yesterday -- Riggs's board would probably reject it, and the merger would fall through. But there are powerful incentives for PNC to reach a deal, analysts said. First among them is the Washington market. Riggs would give PNC a solid market share in the one of the highest-growth banking markets in the country, much faster-growing than PNC's existing major metropolitan markets in western Pennsylvania and Ohio.
Also, PNC has already invested money and time in the merger, and walking away would mean that work was wasted. Lastly, other bidders for Riggs are likely to raise their hand should PNC step aside. At least one bidder remains ready to do so, sources said.
"It all depends on what PNC sees that would cause the price to be lower," Townsend said. "And what another acquirer looking at the same fact set would be willing to pay."
The Allbritton family, which controls about 40 percent of Riggs's stock, is also said to favor a deal with PNC because of PNC's dividend, which has a current yield of about 3.8 percent.
Riggs has its own powerful incentives to accept a deal even if it means shaving off a couple of dollars from the price. The longer Riggs remains independent, the longer its shareholders must absorb costly regulatory and legal costs associated with the company's anti-money-laundering deficiencies. Its plea agreement with the Department of Justice calls for a five-year probationary period in which it would have to submit to close monitoring by the department. Also, in modified pacts signed with its two main regulators on the day of the guilty plea, Riggs agreed to submit to stiff oversight of its capital levels and operations by bank examiners.
A deal with PNC would remove all that.
"We have to sell this bank," one Riggs insider said.
Staff writer Kathleen Day contributed to this report.