NationsBank Corp. said Friday that it would buy a 16% stake in MNC Financial Inc. that gives it the option of acquiring the ailing Baltimore company within five years.
Wall Street hailed the $200 million deal as a bold strategic move with limited risk.
Market Dominance
MNC has been battered by problem real estate loans, but its franchise remains attractive. If North Carolina-based Nations-Bank acquires the company, it will gain a dominant market share in Maryland and Washington, complementing its already dominant position in Virginia.
"Essentially, NationsBank is investing 2.7% of its equity base and less than a quarter's worth of earnings on the option to purchase down the road pretty tremendous franchise," said Susan Leadem, banking analyst with the Robinson-Humphrey Co. in Atlanta.
Shares of NationsBank, which has $111 billion in assets, were unchanged Friday at $45.88.
For MNC, the announcement ended months of intense merger speculation that has more than doubled its stock price since the beginning of the year. MNC's shares on Friday fell 25 cents to $11, reflecting NationsBank's initial entry price of 11.75 a share.
"The initial conversion premium is not a bonanza immediately. Down the road, of course, it could be more attractive for MNC shareholders," said Anthony R. Davis, banking analyst with Wheat First Securities in Richmond.
A Note of Caution
NationsBank's chief executive Hugh L. McColl Jr. emphasized that acquiring MNC was by no means certain. He said NationsBank would acquire the company only if it would add to its bottom line within one year. He also said his company would walk away from the deal if regulators tried to hold it responsible for MNC's financial health.
"This structure gives us the time to see how things play out at MNC," Mr. McColl told a news conference.
MNC chairman Alfred Lerner said the deal will ensure the bank's survival and "gives us the muscle to go back on the offensive in a very serious way."
MNC, with $16.6 billion in assets, owns Maryland's biggest bank and has a sizable presence in Washington and Virginia. The company was pursuing an aggressive growth strategy until 1990, but experienced severe credit problems when the real estate market in the Middle Atlantic region collapsed.
A 16% Stake
Although the analysts believe Baltimore-based MNC has turned the corner, it was saddled with $1.4 billion in nonperforming loans, or a whopping 8.3% of total assets, at the end of the second quarter.
Under the terms of the stake-out agreement, NationsBank will acquire nonvoting preferred shares exchangeable into common stock at $11.75 a share. NationsBank would then own 16% of MNC's common shares.
NationsBank will be able to acquire MNC at a range that escalates between 1.25 and 1.5 times MNC's book value over the next five years. MNC's book value at the end of June was $10.29 a share.
The agreement also sets a floor price of $14 a share in the first three years and $15 a share thereafter.
If MNC gets a better offer from another bank during the five-year period, it can back out of the deal, but NationsBank is entitled to up to 30% of MNC's stockholders' equity, which was $1 billion as of June 30. In addition, NationsBank can still maintain its 16% stake in MNC if the deal doesn't go through.
Mr. McColl told securities analysts earlier in the morning that he considered MNC's realty problems int he metro Washington area to be no worse than the ones NationsBank inherited from C&S/Sovran Corp. MNC and C&S/Sovran, in fact, had shared many of the same credits.
|Opportunity Cost'
NationsBank estimated its actual investment cost in MNC at only between $8 million and $12 million in pretax earnings a year, which represents the "opportunity cost" of not investing that $200 million in securities. The stock that NationsBank gains from its investment will not pay a dividend.
Mr. McColl said NationsBank would not have to raise additional capital, but would be able to pay the $200 million out of $1.4 billion in capital it has already raised in the past 15 months.
Stakeout agreements of the type announced by NationsBank have had a checkered career in banking. The New York law firm Wachtell, Lipton, Rosen & Katz recently surveyed 20 stakeout arrangements announced since the early 1980s and found only four had resulted in an actual acquisition.
The Federal Reserve Board complicated matters last year by raising questions under its so-called source-of-strength or cross-guarantee doctrine concerning Banc One Corp.'s stakeout of Premier Bancorp, Baton Rouge.
This doctrine requires a bank holding company to be responsible for losses at subsidiary banks under its control.
Modification Needed
Banc One was required to modify its stakeout agreement substantially in order to win a determination from the Fed that Banc One would not be deemed to control Premier until the actual acquisition.
"This entire deal is predicated on no source-of-strength or cross-guarantee," provisions, Mr. McColl said.
Mr. McColl said the Fed hasn't yet given a green light to the stakeout agreement, but added, "We have talked to all the regulators and have found them supportive to this transaction. MNC has done the same thing and we expect the transaction will eventually be approved more or less in the form in which it is."
Call from an Old Friend
According to Mr. Lerner, who is chairman of the Progressive Corp., a Cleveland-based insurance company, and an owner of the Cleveland Browns, the deal unfolded in mid-June when he was contacted by Mr. McColl.
The two have been friends for about 10 years, and Mr. McColl has been Mr. Lerner's guest at Browns football games.
"He called and we just talked," Mr. Lerner said. "We never made a presentation."
In June, Mr. McColl and NationsBank chief financial officer James C. Hance met Mr. Lerner and MNC president and chief executive Frank Bramble in Cleveland. During a four-hour meeting, the idea for the so-called stakeout merger "just came up," Mr. Lerner said.
Mr. Lerner and Mr. McColl followed up the meeting with several phone calls, and met on two other occasions to firm up details. On Thursday, Mr. McColl met with MNC's board of directors.
Mr. Lerner, who is MNC's largest shareholder with 9.6% of the stock, said he supports the deal and anticipates the two companies will merge.
He has agreed not to sell his shares in the company for the next two years. He has also petitioned the Federal Reserve Board to extend the time he can serve on both MNC's board of directors, and the board of its former credit card unit, MBNA.
Mr. Lerner is required by regulation to step down from one of the companies' boards by January.
"If the deal goes forward, I plan to be a very large shareholder of NationsBank," he said. "If everything goes the way I expect it ... I expect to live happily ever after."
