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Subject:  PNC Buys Mercantile Date:  10/9/2006  2:54 PM
Author:  tenshuma Number:  107 of 114

PNC shares recently lost $3.42, or 4.65%, to $70.18. Mercantile shares, meanwhile, rallied 22%, or $8.11, to $44.89.

"Investors hate the fact that PNC has purchased Mercantile Bank," wrote Dick Bove, analyst at Punk Ziegel & Co in a note.

On a short term basis, the deal reduces the likelihood that PNC itself would be acquired and eliminates the likelihood of a stock buy back, Bove said.

With the purchase, PNC immediately put to use the $1.3 billion proceeds of the sale of a 69% stake in its money-management unit BlackRock Inc to Merrill Lynch.

Wall Street analysts viewed the Mercantile deal as making sense strategically -- extending PNC's banking footprint in the wealthy eastern corridor of the U.S. -- but many also viewed it as too expensive.

Following the deal's announcement, Prudential analyst Michael Mayo downgraded PNC stock to underweight from neutral and said he saw a negative bias to his earnings estimates.

Given a $1.3 billion premium to Mercantile's market price, Mayo said the deal "destroys roughly $850 million in value" for PNC, taking into account overall cost savings of $500 million and merger-related one-time charges.

While Mercantile had $1 billion in excess cash, this was already reflected in its stock price, Mayo added.

Depending on their assumptions regarding the impact of Mercantile's excess cash on the stock, analysts had different views of the premium paid.

A UBS analyst said the deal represented a fairly reasonable 12% premium, while a Morningstar analyst viewed the premium at 26% of his fair value estimate of Mercantile shares.

Analysts also frowned on the long time-frame for the deal to become accretive to earnings.

Speaking on a conference call after the deal was announced, PNC chief financial officer Richard Johnson said the deal would be dilutive to 2007 earnings before adding to earnings in 2008.

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