Citigroup Backs Out of Wachovia Deal, Wells Fargo To Take Over.

10/10/2008 02:13:00 AM

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1080296 Citibgroup announced that it had reached no agreement with Wells Fargo following several days of discussions about matters related to Wachovia.  The dramatic differences in the parties' transaction structures and their views of the risks involved made it impossible to reach a mutually acceptable agreement, the Charlotte Business Journal reported.

In an official announcement on October 9, 2008, Citigroup stated the following:

"We are proud to have been part of an historic transaction that was supported by all of the federal banking agencies and the Secretary of the Treasury, after consultation with the President, and that we carefully designed to avoid systemic stress and to advance the interests of our shareholders", Citibank said in an official announcement.

"Without our willingness to engage in this transaction, hundreds of billions of dollars of value would have been seriously threatened.  We stood by while others walked away.  Now, our shareholders have been unjustly and illegally deprived of the opportunity the transaction created."

Although their deal is off Citigroup believes that it still has strong legal claims against Wachovia, Wells Fargo and their officers, directors, advisors and others for breach of contract and for tortuous interference with contract.  Citigroup plans to pursue these damage claims vigorously on behalf of its shareholders.  It is probable however, that the issue is still likely to go to court as Citigroup still plans to seek damages for Wachovia's decision to choose Wells Fargo over an earlier agreement it had made to sell its banking operations to Citigroup for $2.1 billion. 


Christina Pretto of Citigroup says the bank will seek the $60 billion in damages it has claimed from the deal gone sour.  That case will proceed, she says, in New York Supreme Court.  She could not say when hearings might be held on Citigroup's claims.

"We did not seek the Wachovia transaction; Wachovia brought it to us," stated Citi CEO Vikram Pandit in a prepared statement,

However, Citigroup has decided not to ask that the Wells Fargo-Wachovia merger be blocked.

Under the Citigroup's agreement with Wachovia, Citigroup would have absorbed up to $42 billion in losses on a $312 billion pool of loans.  The FDIC would have absorbed losses beyond that.


The Wells deal was generally preferred by bank employees and in Charlotte.  Wells said it would keep the bank intact.  Because Wells has few operations on the East Coast, there were likely to be minimal job losses below the corporate level.  And a promise to make Charlotte Wells' headquarters for East Coast operations took some of the sting out of the sale of Wachovia, who is Charlotte based.  The price offered by Wells was also seven times what Citigroup had offered.

Analyst Nancy Bush of NAB Research said the decision was a good deal for Charlotte.

"You guys should be breaking out bottles of champagne," Bush said.  Wells Fargo "will be so much more careful of the corporate culture, of Charlotte, of the customers.  They have more retail experience than Citigroup does."

Bush additionally stated that the fact that Citigroup backed down indicated that criticism from customers and shareholders had grown too much.  Of the legal dispute,

"I'm sure (Citi) will ask for a bazillion dollars, and Wells Fargo will give them something."  "There will be some kind of out-of-court settlement."


Wells Fargo & Co. confirmed the announcement that it and Citigroup have terminated discussions concerning a possible sale of certain banking assets of Wachova Corp. and reaffirmed that it is proceeding with its merger with Wachovia Corp as a whole company transaction wtih all Wachovia's banking and other operations. The BIG news about this deal, is that it requires no financial assistance from the FDIC or any other Fed agency.

Wells Fargo has submitted its application to the Federal Reserve Board seeking expedited approval of the merger and the share exchange agreement previously entered into between Wachovia and Wells Fargo.  That agreement, which was signed and board-approved given to Wachovia last Thursday, proposed that each share of Wachovia common stock will be exchanged for 0.1991 shares of Wells Fargo common stock, representing a value of $7 per share, based on Wells Fargo's closing stock price on Oct. 2, 2008.

Under the same exchange agreement, Wachovia is issuing Wells Fargo preferred stock that votes as a single class with Wachovia's common stock representing 39.9 percent of Wachovia's voting power.  The acquisition of the non-banking related operations of Wachovia and the share exchange agreement have received early termination from the FTC under the Hart-Scott-Rodino Act.

Wells Fargo will acquire all outstanding shares of common stock in Wachovia in a stock-for-stock transaction.  In the transaction, Wells Fargo will acquire all of Wachovia Corporation and all its business and obligations, including its preferred equity and indebtedness, and all its banking deposits.

Wells Fargo Chairman Dick Dovacevich reiterated that the two companies have a firm, binding merger agreement, are confident the merger will be completed, that it will keep Wachovia intact and create significant value for Wachovia and Wells Fargo shareholders.

In addition, Kovacevich said Wells Fargo is pleased that Citigroup announced that it is no longer seeking that the Wells Fargo - Wachovia merger be enjoined. 

"We believe that that is the correct and right decision for our Country and our citizens and the health of our already stressed financial system, as well as our and Wachovia's respective shareholders and stakeholders, " said Kovacevich.

Wachovia Corp President and CEO Robert K. Steel had the following to say on the matter:

"We are delighted to stride ahead with Wells Fargo in creating a coast-to-coast financial institution -- one of the strongest financial firms in the world," said Wachovia Corporation President and CEO Robert K. Steel.

Kovacevich also address, at least indirectly, press reports Thursday indicating that Wells and Citigroup had both found more problems in Wachovia's mortgage portfolio than expected.

"Credit teams at Wells Fargo have had an opportunity to work with their counterparts at Wachovia," Kovacevich said.  "Given our broad-based operating expertise, and specific understanding of these individual businesses we believe we have adequately evaluated the risks inherent in the portfolios as of time of this merger agreement."

The scary part of all of this is that Wells Fargo and Wachovia will have the largest deposit base in the country, creating a coast-to-coast banking franchise for customers.  The combined company will have $1.42 trillion in assets, $787 billion in deposits, 48 million customers, $258 billion assets under management in mutual funds, 10,761 stores, 12,227 ATMs and 280,000 employees.  In addition, Wachovia will combine with the only AAA-rated financial institution in the United States. 


Citigroup (C:  12.93, -1.47, -10.2%)
Wells Fargo (WFC: 27.25, -4.65, -14.6%)
Wachovia (WB:  3.60, -1.46, -28.8%) - But shares have gained 36% in after-hours trading to $4.89 on Thursday night.


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