The Lowdown on Citi / Wachovia 83 comments
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As a Wachovia (WB) investor, I was shocked by this morning's news - it was just too much, too fast. Anyway, based on the news this morning, here is the lowdown on the deal.
Citi (C) takes over Wachovia's banking/mortgage business: Citi pays Wachovia $2.1 billion in stock in exchange for Wachovia’s banking and mortgage assets (over $700 billion in deposits+assets). Citi also assumes about $53 billion in debt. Citi needs to cover losses up to $42 billion on mortgage related losses. Anything beyond that is guaranteed by the Federal government. In exchange for that guarantee, the Feds get $12 billion in preferred Citi stock, which pays 6% interest - possibly a sweet deal for the Feds. Wachovia's over $300 billion mortgage portfolio had about $120 billion in option-ARM mortgages and expected losses on about 14% of those loans, but really, is the deal justified?
Wachovia keeps the other businesses: Wachovia Securities, Evergreen Investments and Wachovia Insurance Services will remain part of Wachovia. The question here is how much the remaining Wachovia is now worth. Wachovia Securities is the nation's second largest investment firm, Wachovia Insurance Services is the 12th largest insurance brokerage and Evergreen Investments is America's 29th largest asset management company. So now each Wachovia share is worth $1 from Citibank's 2.1 billion + whatever these businesses are worth.
In pre-market trading, even before any details were announced, Wachovia stock dropped 90% and trading was halted at the NYSE on WB for the day. In spite of everything, the S&P still maintains its hold rating on WB but will revise its price target.
What does all this mean for you? Well, I’m not even sure this whole Wachovia mess was necessary in the face of the bailout. But the question facing us now is - is the bailout necessary in the the face of this deal?? Your deposits at both Citi and Wachovia are safe and the FDIC doesn’t need to spend anything here. Your local Wachovia will soon become a Citibank and Citibank plans on moving its banking headquarters to Charlotte, NC, while keeping its investment headquarters in NYC. Since Citi and Wachovia don’t have much of an overlap in branches, not much is expected to change for depositors.
Disclosure: Author holds a long position in WB
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This article has 83 comments:
Best,
Frank Miller
www.theoffshorebankacc...
What is the company stock worth after the financial crisis is over?
On Sep 29 12:55 PM Ishortyou wrote:
> Well you just said it, now that Wachovia got rid off all the JUNK
> and debt is not difficult to guess that what the book value they
> have now is worth much more to what it was before, no more uncertainties
> and toxic on waste, with the rest of the business looks like Merrill
> Lynch without the toxic waste so if I have to guess its stock is
> worth around 25-40 dollar range, plust not to mention that has a
> good CEO like Steel who was a good manager in mutual funds....lol...interes...
> times indeed.
2) I see the comparison to Merrill, whose book value was $35 million at 6/27/08. WB book value was $75 million on 6/30/08. What will it be after sale of banking assets?
3) I recall Wm Goodwin, a director bot 1 million shares at $11 on 9/17 and John Baker, director, bot 25,000 at $12. Does anyone have comments about Goodwin's buy? He seemed to have seen value at $11.
I'm guessing that future earnings will probably be in the range of .35 to .40 cents per common share. In a normal market (which this isn't), the stock could probably command a P/E ratio of 8. This would place the value of the residual WB stock at $3 per share. Adding in the $1 from Citigroup you have a value of $4.
WB may actually be a buy if it goes below $1.50.
$3-4b of value. At 2.1b shares outstanding, this baby is only worth $2/share. However, it is an incredibly attractive takeover candidate for a Santander or HSBC (possibly even an insurance outfit from overseas as well). Could be highly accretive for a potential acquiror at $3 or $4 / share. I just nibbled at $1.49.
@denham - Wall Street has been looking good for a takeover for a while. Soon nothing will really be "American" if this goes on. e.g. Mitsunishi took a 21% stake in Morgan Stanley today. It's a fire sale
We now have a clearer idea of what will remain in Wachovia Corp (WB) after the transfer of the banking assets and corporate debt to Citigroup (C).
I spent all day reading Wachovia Corp prospectuses hoping that the common and preferreds would get hit when they opened. It seems that others were reading them too.
The WB common closed in the after market today around $2. That is after being halted in the pre-market at $.90/share.
There are several different preferreds issued by Wachovia and they have unique features. Some are actually backed by debt. (WBprB, WBprC, WBprD). Dividends can be skipped for 10 years without triggering a default. I assume (a dangerous word) that these will
become debt of Citigroup. That is not 100% clear. All three are $25 par and trading between 9 and 11.
Then, there is WBprS (called preferred J) which is a 1/40 share of an actual preferred with an 8% dividend. It was sold in Dec. 2007. The dividend is not cumulative and this preferred is equity. It will continue to be a security of Wachovia Corp. It closed around $7.
The WBprT was issued at $1000/share in April 2008. It has a lot of moving parts. It closed at $320 and traded actively in the after market session. I suggest that you read the prospectus:
www.sec.gov/Archives/e...
Dividends on this preferred are 7.5% and not cumulative. It will continue to be a security of WB.
Then you have to figure out what the remaining Wachovia will be worth. It will consist of Wachovia Securities (including AG Edwards), Evergreen funds, an insurance subsidiary, and the $2.1 billion of Citigroup shares it will receive when the bank transaction is completed.
The common shareholders have to approve this.
There will possibly be a very large tax loss carry forward and this may be of value to a merger partner.
Prudential (PRU) will continue to own a minority interest in Wachovia Securities.
I don't know what all this will turn out to be worth, but I think all these preferred securities
will be worth more than today's closing prices in 6 months. The preferred securities that
remain with Wachovia will all rank ahead of the WB common stock.
After contemplating this situation all day, I wondered why Steele has been silent...then something clicked a few minutes ago. I think Steele & Company may have pulled off a very shrewd deal. By including the clause "pending shareholder approval" WB may have bought itself much needed time. The "deal" is expected to close by the end of the year, but by then bailout package may be passed with "better terms/%s" for buying the crap. Analysts then realize the loans have a higher value, shareholders reject the deal, and WB regains all of its assets in a somewhat more stable environment.
Citi may have been thinking along the same lines. By temporarily making itself bigger it "prevented" a run on its bank by making appear temporarily "as to big to fail".
This is a "win-win" for both banks...giving them, as well as common shareholders, a lifeline for 3+ months.
Any thoughts? BTW is there a book I can pick up or website i can go to that 1) offers detailed valuation techniques and 2) clearly ranks the order of payout and detailed terms of the preferreds. Thanks.
The # is (704)-383-0798. I don't know how much the stock is worth; but I think we deserve a hell of a lot more than $1./per share from Citigroup.
First, the deal has to be approved by the Wachovia shareholders.
(maybe the debt holders are buying WB common with this in mind)
Second, a lot of things could still go wrong. Either with the system, Citi itself, or Wachovia.
@those who think shareholders have to vote on this, post here when you find out how and when
Could the failed rescue package have been designed with the Citi buy-out as a condition or assumption?
triad.bizjournals.com/...
I bought more shares at $1.90 yesterday thinking that the $1 we got from Citi and the other assets were worth more. Hehe, I just got a 50% return. Not close to offsetting my big losses.
The S&P report values the remaining part of Wachovia at $2 and they value the part of Wachovia taken over by Citi at somewhere between 8 and 9$. Citi paid about 7$ for that, most of which went to the Feds. Why?
This could be of great value to another highly taxed corporation.
Probably won't help unless the next bailout vote fails, but what the hell choice do you have?
@terpanther - I sent you an email
are now Citigroup preferreds. Wachovia preferreds S and T and WNA preferred are still Wachovia preferreds.
I have no problem waiting a couple of years for the stock to rebounce but I have a problem exchanging my stocks for $1....Opinions?
On Oct 01 12:27 PM syndicat wrote:
> Wachovia common stock is still WB. Wachovia preferreds B, C and D
>
> are now Citigroup preferreds. Wachovia preferreds S and T and WNA
> preferred are still Wachovia preferreds.
If the bailout package passes in its current (modified) form, the SEC can suspend mark to market accounting (which should help all banks with illiquid CDOs), the government will help create a market for CDOs (whether banks choose to sell directly to the government or to take advantage of the liquidity created) and FDIC deposit insurance will cover $250,000 for individual accounts.
All of this would have helped stem the tide at banks like Wachovia but Paulson/Bernanke/Bush were never proactive enough to get in front of the problem. Indeed, even now, they should have proposed much higher deposit insurance limits as some European countries have done.
Wachovia was never taken over but instead sold itself subject to shareholder approval.
If circumstances have drastically improved in Wachovia's favor, there's no reason why shareholders shouldn't demand a higher sale price?
It seems there is still some confusion about whether common WB stocks are going to be Citi stocks or not. According to [Oct 01 12:27 PM] syndicat WB stocks will still be WB stocks. Does investor relation @ Wachovia tell something different? Also: Why in the world should shareholder accept a trade of WB stocks @ $1 when the stock is currently trading much higher? Does not make sense to me. Would you sell your car for $1000 when you get $3500 at the current market?
Also if shareholders get to vote on this, who are the people who would vote for this stupid deal?? Citi pays 14billion for wachovia but 12 of it to the Feds! We want that money as shareholders, what is it going to the Fed for - a stupid guarantee that they will probably never need to make good on anyway?
Citi is assuming all of WB's debt. Should the deal be approved then the market cap of the remaining firm might be 50% of Morgan (around $26 billion). That works out to a little over $12 per share. Morgan has debt and WB would not. Morgan has a more extensive network and would have a less tarnished name.
The alternative to voting for this is seizure by the FDIC. The bank then is gone and WB is still stuck with all the debt not in the bank's name. The talk of a class action lawsuit is a pipe dream. That is no alternative to a sale to Citi. Where are you going to collect the money from if the firm is bankrupt?
Bear Stearns shareholders in that respect had no more leverage than Wachovia shareholders do now.
The market's perception is that this is a great deal for C based on the price action of C stock since the deal.
How do you get a $13 billion valuation for what remains of Wachovia after this deal? How do you account for preferred shares that remain on Wachovia's books after this deal is completed?
Wachovia is not and never was bankrupt. If the deal goes through they still have Wachovia Securities, Evergreen Investments and Wachovia Insurance Services; all much more worth than just $1 per share. If the deal does not go through I am convinced they can get out of this situation without a bailout.
So where was the difference in BOA taking over Merrill Lynch, which otherwise would have likely gone bankrupt, from Citi to take over Wachovia? The only difference I see is that BOA paid a fair price with Merrill Lynch stocks still trading fairly well after the anouncement. Why did Citi get away with such a cheap price for Wachovia stocks causing the huge drop in WB value? Guess time will tell...
CITI DEAL IS OFF!! Wells fargo intends to buy wachovia at a value of about $7 per share. Stock is pre-trading @ $6.70.
Now how about that! :-) Finally we come closer to the "real" value of WB stocks...Thus folks--hold on to your WB stocks...
www.parchayi.com/2008/.../
It should soon be on seekingaplha too
Creditors can force companies into bankruptcy. It's called an involuntary petition for bankruptcy.
If you subtract $42B (citi's loan loss estimate*) from WB 6/30 equity of $75B, you get $33B. Then subtract preferred stocks ($2.3 + 3.5 + 4.025 = $9.825) and you're left with $23.175, which is about $10.85 per share.
WB shareholders could try to hold out for $10 - 11 via a rescue plan or take $7 in the stock of a company with very capable management. Fortunately, we don't have to decide right away.
*According to Siddarth Dalal's initial post, $42B = 14% of $300B mortgage loan portfolio and 35% of $120B option arm portfolio. IMHO, these are probably pretty good estimates of what WB could expect in the way of discounts in a rescue plan.