December 15, 2008

National City: Interesting Fairness Opinion

– by John Jenkins, Calfee, Halter & Griswold LLP

While people often think that fairness opinions consist of nothing but boilerplate, that’s not the case when the one of the parties is facing particularly challenging circumstances. Goldman Sachs’ fairness opinion in the PNC/National City deal is a classic example of this point (here is the proxy statement). The pending sale of Cleveland-based National City Corporation to Pittsburgh’s PNC has raised a lot of concern here in Northeast Ohio, and has engendered controversy on Capitol Hill as well.

As a result, National City’s story is fairly well known. Goldman Sachs served as National City’s financial advisor in the PNC transaction – and rendered a fairness opinion to the company’s Board of Directors. While that opinion contains all of the standard assumptions, qualifications and disclaimers that we’ve come to expect in bankers’ opinions, it also contained several deal-specific provisions that are pretty interesting.

For example, in addition to the usual disclaimers typically found in most fairness opinions, Goldman’s opinion specifically notes National City’s expectation that absent a deal like the one proposed with PNC, it would not have the liquidity to meet its obligations, and “would face additional regulatory actions, including intervention by the United States federal banking regulators, and/or be required to seek protection under applicable bankruptcy laws in the very near future.”

After detailing these considerations, Goldman Sachs addressed their influence on its fairness analysis:

You have advised us that, as a result of the foregoing, the Company and its Board of Directors are faced with a narrow set of alternatives, which, at this time, are limited to a transaction such as the Transaction or intervention by United States banking regulators and eventual liquidation of the Company. Accordingly, we also considered recent instances where concerns regarding the liquidity of a bank or financial institution triggered a rapid deterioration of the institution’s financial condition, necessitating government intervention or bankruptcy protection, and as a result of which the common equity holders of the institution are likely to receive substantially diminished value, if any at all, for their equity. In light of the facts and circumstances, and in reliance on the Liquidation Analysis, we have assumed that if the Company’s banking assets were taken over by the United States federal banking regulators and the Company’s non-banking assets liquidated under applicable bankruptcy laws, the Holders would likely receive no material value for the Shares.

In English, that means that Goldman’s assuming that the only alternatives available to the board are a deal like the one offered by PNC – or a government takeover or bankruptcy filing in which its shareholders would get nothing. This is not pleasant reading if you’re a National City shareholder, but it gets worse. A few paragraphs later, Goldman Sachs tacks on a sentence to one of its standard disclaimer paragraphs that makes sure nobody misses what National City’s dire condition and the unique circumstances confronting it are likely to mean from PNC’s perspective:

We do not express any opinion as to the value of any asset of the Company, whether at current market prices or in the future. We note, however, that, under the ownership of a company with adequate liquidity and capital, such as Parent, the value of the Company and its subsidiaries could substantially improve, resulting in significant returns to Parent if the Transaction is consummated.”

Unfortunately, given the likelihood that survival may well be a driving force in M&A deals over the next several months at least, it’s unlikely that National City’s shareholders are going to be the last ones to receive a message like this one.