Citi/Wachovia/Wells Fargo Saga Takes Center Stage

This Wachovia (WB) episode is only getting more interesting. Before there is a resolution to this catfight, I thought it would be worthwhile to point out the pros and cons of each outcome.

This deal is a no-brainer for everyone but Citi (C):

1. Wells Fargo (WFC) is using private money to buy Wachovia, meaning no tax dollars are necessary.
2. It will assume ALL of Wachovia’s operations, not just commercial banking.
3. Wachovia shareholders get $7 instead of $1 per share.
4. The Citi deal requires the “good bank/bad bank” scenario, where it takes only the good stuff, and leaves the rest to the FDIC to take care of.

The bad part of this outcome is placed solely on Citi. On Monday, it said that cutting its dividend in half was an action to shore up capital for the Wachovia deal, but now without the acquisition, that argument is out the window. In addition, even before Wells Fargo came in with the $15 billion deal, there wasn’t any relative basis to say that Citi’s $2 billion offer was too low.

Wall Street initially applauded Citi’s move to buy Wachovia, because it signaled that they had a strong enough balance sheet to be expanding in this environment. For a brief time, it was moving into the tranche of Wells Fargo, JPMorgan (JPM), and Bank of America (BAC) (As told by the stock price hitting a 3-month high).

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In short, we already know that Wells Fargo was in better shape than the pack, but we cannot prove that Citi, the only bank left with anything close to its astonishing $51 billion in write-downs, is improving. The Wachovia deal provides it with an opportunity to signal to Wall Street that it will make it through this mess, and that it will not need another loan from Abu Dhabi, or Prince Al-Waleed.

Considering all of this, maybe we are seeing resistance from the Federal Courts (besides the legal ramifications) because this is the only viable acquisition left on the table for Citi to make, and it would be able to offset any bad news to come.

Disclosure: None

Comments

[Ishortyou:]

Well I guess is time to put themselves to work instead of whining of who gets who and start remdiating the banking book of business of Wachovia by selling those toxic loans and getting hudge advantage of the tax break, Wachovia needs to do this the sooner the better while things sort themselves out.

2008 Oct 07 08:03 AM