Fidelity Investments has doubled its stake in MNC Financial Inc. to nearly 10%, hoping to cash in on an expected takeover by NationsBank Corp., market sources said.

If the deal is done next year at the guaranteed minimum price of $14 per share, Fidelity stands to gain an estimated $50 million, or 40%, on the investment.

A Major Holder

The Boston-based mutual fund company, the biggest institutional holder of bank stocks, declined to confirm the size of its purchases in the quarter, but portfolio manager Bruce Herring said that it had increased its holding substantially.

As of June 30, the company held about four million shares, or about 4.5%. But market sources said the company added five million in the third quarter. It paid about $8.50 a share for the stake, Mr. Herring said.

Fidelity is now the Baltimore bank's second-biggest shareholder, after chairman Alfred Lerner, who holds 11%.

The buying spree began after NationsBank announced in July that it invested $200 million in MNC - equivalent to a 16% stake if the preferred shares are converted to common stock. It also acquired the option to buy the banking company within five years.

"MNC is a good buy because NationsBank is going to come in and will buy it out," said Mr. Herring. "I think that will be sooner than later."

Fidelity has been buying MNC shares steadily since fourth-quarter 1991, betting on the bank's ability to rebound and take advantage of its franchise in Maryland and Washington.

NationsBank's deal with MNC seems to have sapped the life out of MNC's share price, which had more than doubled this year from an initial $5. Since the announcement, the share price has stagnated at around $10.

One reason is that if NationsBank does buy MNC, the takeover price provides a cap on MNC's share value. And that has turned off some investors.

The takeover price is based an a premium over book value adjusted for securities gains and other factors, although NationsBank guarantees that the minimum buyout price will be $14 a share.

The premium paid by NationsBank escalates each year. If a merger is signed between now and September, the premium would be 1.25 times adjusted book value. For the next 12 months, the premium rises to 1.3.

Eventually, the premium tops off at 1.5. It's likely that if NationsBank decided to buy MNC next year, it would wait until September, just before the premium rises.

By Mr. Herring's calculations, the takeout price would be $15 a share in 1993. If NationsBank waits another year, the per-share cost will go to $17.80, he said.

"It's not ideal to have the upside capped," said Mr. Herring. "But you have to keep in mind what the annual return is."

Return Linked to Date

An investor who buys the stock today, at just under $11, would realize a 36% annualized return on investment if NationsBank steps in at the earliest date, said Mr. Herring.

If the Charlotte, N.C., banking company waits until 1994, the annualized return on investment drops to 27%.

The signing of a merger agreement hinges on NationsBank's belief that MNC's loan troubles are under control.

In the third quarter, MNC reported a profit of $4.5 million, versus a loss of $59.5 million in the corresponding quarter in 1991. since MNC does not pay a dividend on its common stock, it can use profits to bolster retained earnings. This increases book value and, in MNC's case, the takeover price.

MNC's load of bad assets fell, as they did the previous three quarters. Nonperforming assets have fallen $520 million in the past year, although they are still 13% of all loans. The loan-loss reserve at the end of the third quarter covered 90% of those bad loans.

A NationsBank spokesman would not comment on a possible takeover date. He did say, however, that the "acquisition would give us a franchise that we always thought was attractive."

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