National Cityis reportedly in talks to sell itself to Cleveland neighbor KeyCorp, among other banks, but the bank is taking a long time to find buyers, triggering investor fears that it will not be able to sell much above its current share price.
National City's shares oscillated on Wednesday morning, trading up a bit and down as much as 3.3 percent, which is unusual because talk of a possible sale usually lifts a company's share price dramatically.
Media reports have said for weeks that National City was looking to sell itself, and on Tuesday the company said it was exploring strategic alternatives.
That formal announcement could signal that buyers are few and far between, said Adam Compton, co-head of global financial stock research at RCM Global Investors in San Francisco.
"They've actually announced they're exploring strategic alternatives, and to me that's the headline you never want to see, because the deal should have been done already," Compton said.
National City's share price has fallen more than 70 percent over the last year. But even with those declines, the bank might not receive much of a premium over its current share price on a deal, Compton added.
The Wall Street Journal reported on Wednesday that KeyCorp might buy its cross-town rival in a deal that could allow the banks to generate big cost savings.
If the transaction were to occur, the combined company could receive a capital infusion from private equity firm Kohlberg Kravis Roberts & Co, sources told the newspaper.
The housing downturn, which has been particularly brutal in National City's primary markets in Ohio and Michigan, has forced the bank to boost credit reserves and write down bad loans. National City posted a $333 million loss in the fourth quarter.
In January, the bank sold $1 billion of convertible senior notes, which established companies typically do only if they have trouble raising funds through regular corporate bonds. National City on Tuesday said Goldman, retained as a capital raising adviser early January, would now act as its strategic adviser.
A KeyCorp purchase of National City could help both banks cut costs, which would be a major selling point for the deal, analysts said. One fund manager who requested anonymity said any deal could generate $1.5 billion of annual cost savings.
For that reason, a merger between the two Cleveland banks has been seen as a possibility for more than a decade among investors eager for more consolidation among regional banks.
Private equity firms such as KKR are generally looking at making investments in regional banks, because of their low-cost deposits and unusually low stock prices, the Wall Street Journal reported.
National City, KeyCorp and KKR declined to comment.
National City has been considering some sort of business combination for months. In September Chief Executive Peter Raskind said at an analysts' conference that National City believed it will need to be "materially larger" to remain competitive over the next several years.
"We may find that we need to think a little differently about M&A going forward in order to address the scale issue," Raskind said.
National City's shares rose 5 cents to $10.04 in morning trading, but touched as low as $9.66, while KeyCorp's shares rose $1.15, or 4.9 percent, to $24.65.