(Bloomberg) -- PNC Financial Services Group Inc. is cashing out one of the financial industry’s most lucrative bets, selling off its BlackRock Inc. stake. The move will bolster the bank amid the coronavirus pandemic and allow it to seize opportunities to grow if rivals stumble.
The Pittsburgh-based lender announced plans Monday to unload its roughly $17 billion holding in the world’s largest asset manager through a public offering. PNC is BlackRock’s largest shareholder, a relationship that began about 25 years ago when the bank bought the business from Blackstone Group Inc. Steve Schwarzman, Blackstone’s leader, went on to say selling that division was “a heroic mistake.”
The decision to exit the investment now surprised some analysts after PNC long credited its BlackRock holding with diversifying earnings. But with banks across the industry facing the prospect of loan defaults, executives at PNC are positioning for another bet: That the firm can better withstand the turmoil and potentially make a major acquisition, according to people with direct knowledge of its strategy.
“The sale of BlackRock shares likely signals that PNC is looking to make a sizable deal during a period of market disruption,” which is consistent with its past behavior, said Kyle Sanders, an analyst at Edward Jones.
He pointed to the firm’s takeover of National City Corp. during the 2008 crisis, and said it’s probably hoping for another opportunity -- “likely another regional bank.”
PNC currently holds 22% of BlackRock’s outstanding shares. The bank will exit the stake through a public secondary offering with BlackRock buying back $1.1 billion of the shares directly from the firm. Morgan Stanley, Citigroup Inc. and Evercore ISI are joint bookrunners.
Now is the right time to “unlock the value of our investment,” PNC Chief Executive Officer William Demchak, who is also on BlackRock’s board, said in a statement. The move enhances PNC’s balance sheet and will leave the company “very well-positioned to take advantage of potential investment opportunities that history has shown can arise in disrupted markets.”
The decision was prompted in part by the widening gap between PNC’s market value and BlackRock’s, according to one person familiar with the bank’s thinking.
Shares of BlackRock were down less than 2% this year by Monday’s close of trading, compared with a 36% drop for PNC. The broader S&P Regional Banks Select Industry Index has lost 40% of its value this year.
BlackRock fell an additional 2.3% at 6:50 p.m. in extended New York trading after the announcement.
Still, the disposal isn’t likely to dent BlackRock’s business, said Jefferies analyst Dan Fannon. “Given that the BlackRock-PNC relationship was more financial, we do not believe this will have an impact on BlackRock’s long-term competitive positioning and outlook,” he wrote in a note to clients.
Back when PNC purchased BlackRock, it was a mortgage securities division of Blackstone with about $23 billion in assets. Over the years, the firm branched well beyond those origins. It made a well-timed move into index-based investments, and swelled as passive investing became more popular in the wake of the global financial crisis of 2008. BlackRock oversaw about $6.5 trillion at the end of March.
The deal comes as U.S. companies grapple with the fallout from widespread lockdowns that forced businesses to shutter, leaving banks with worries about the quality of their outstanding loans to consumers, home buyers, local businesses and corporations.
Even with this year’s selloff, PNC’s stock has more than doubled since the end of 2008, when it bought National City for about $5 billion. In that time, it has far outperformed the broader KBW Bank Index tracking 24 of the nation’s largest lenders.
“The bolstered capital levels reinforces PNC as a safe-haven bank that stands ready to capitalize, in our view,” wrote Herman Chan, an analyst at Bloomberg Intelligence.
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