By Aron Adamski, BSc Economics @LSE
OVERVIEW OF THE DEAL:
- Announcement date: 16/11/2020
- Industry: Banking
- Deal Value/Tangible Common Equity: 1.3x
- Financing: All-cash
- Acquirer advisors: Citigroup, Evercore, PNC FIG Advisory
- Target advisors: J.P. Morgan
PNC Financial Services Group has agreed to acquire BBVA’s US operations from Spain-based Banco Bilbao (BBVA). The deal will create 5th largest US retail bank by assets and will enable PNC to expand their presence in some key states, such as:
- Alabama by 88 branches to be ranked 2nd with a 18.46% share of approximately $129.47bn in total market deposits,
- Texas by 328 branches to be ranked 7th with a 3.1% share of approximately $1.43tr in total market deposits
- Arizona with 63 branches to be ranked 5th with a 3.65% share of approximately $172.56bn in total market deposits
The transaction comes six months after PNC sold its 22% stake in BlackRock for $17bn. At the time the sale was motivated by concerns over the future of US economy due to the pandemic, hence the sale to bolster the balance sheet. Now, with the vaccine in sight the group spent almost as much on acquisition of BBVA as its after-tax BlackRock proceeds.
“We’ve managed to effectively trade the BlackRock ownership stake we had for a franchise that takes us coast to coast” ~ Bill Demchak, PNC CEO
BBVA plans to use the proceeds from its US exit to buyback shares.
“We have been pretty smart at capitalising on a very rare, unique opportunity of having a strategic purchaser with cash in hand”~Onur Genc, BBVA CEO
Initially, the transaction is expected to be dilutive to tangible common equity per share, falling from $96 to $88 per share, but more than $86 per share before the sale of the BlackRock minority stake. Nonetheless, PNC expects 20% EPS accretion in the 2 years after the merger.
The deal is expected to close in Q2 2021.
COMPANY DETAILS: PNC Financial Services Group Inc.
- Founded in: 1845
- Headquartered in: Pittsburgh, Pennsylvania, United States
- Market cap: $56.6B
- Price/BV: 1.14x
The PNC Financial Services Group is one of the largest diversified financial services institutions in the United States. It offers retail and business banking products, corporate banking, real estate finance and asset-based lending, wealth management and asset management solutions. Its banking subsidiary, PNC Bank, operates in 21 states with more than 2,000 branches and around 9,000 ATMs.
COMPANY DETAILS: BBVA
- Founded in: 1857
- Headquartered in: Bilbao, Spain
- Market cap: $24.5B
- Price/BV: 0.57x
BBVA is a global financial services group with strong leadership position in the Spanish market and is the largest financial institution in Mexico. It has leading franchises in South America and the Sunbelt Region of the United States. In the U.S., BBVA is a Sunbelt-based financial institution that operates more than 600 branches. The bank ranks among the top 25 largest U.S. commercial banks based on deposit market share. In the U.S., BBVA has been recognised as one of the leading small business lenders by the Small Business Administration (SBA) and ranked 14th nationally in terms of dollar volume of small business loans originated in FY19.
STRATEGIC RATIONALE:
MARKET SHARE EXPANSION
The acquisition will create the fifth-largest US bank by assets (behind JPM, BofA, Wells Fargo and Citi), overtaking Truist. The transaction will also give PNC presence in several important growth markets, for instance in Texas, helping the bank build a nationwide franchise. PNC will have a coast-to-coast footprint after the deal closes, as it gains BBVA USA’s 639 active branches throughout Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas.
“For BBVA, they have a lot of capital in the USA and invested heavily in technology, but could not bring [their operation] to scale and were in effect under-earning” ~ Bill Demchak, PNC CEO
Moreover, PNC is able to pull off the expansion “cheaply”, paying 1.3x tangible book value for BBVA, the lowest multiple since 2011. The price represents 50% of BBVA’s market cap.
SYNERGIES
The deal is expected to generate about $900mn in cost savings, mainly through rationalisation of global management and reduced regulatory costs. BBVA has 49 branches within a two-mile proximity of a PNC branch, so the branch rationalisation is probably going to be a very small component of the savings.PNC expects the deal to be 20% accretive to their EPS in second year after the merger.
One could fairly confident in these projections given that UBS upgraded PNC from “sell” to “neutral” after the announcement and raised the price from $88 to $122. UBS estimates 2020 EPS for PNC to be unchanged at $5.03. The 2021 and 2022 EPS estimates, meanwhile, were increased to $8.85 and $11.44 from $7.59 and $9.36, respectively.
“We’re a better owner of the asset — we have lots of synergies and lots of products they don’t have” ~ Bill Demchak, PNC CEO
RISKS AND UNCERTAINTIES
PNC will need to work hard to effectively compete in Texas, a state full of very strong banks. PNC isn’t a household name there, with JPM and BofA in the lead.
“Getting those assets and having that asset base to grow off of is a real big advantage as opposed to just going in a market where you’re starting out brand new.” ~ Terry McEvoy, Stephens Managing Director
