Wachovia Dumps Citigroup, Merges with Wells Fargo

Includes: C, WFC
by: Ron Haruni

On Friday, Wachovia Corporation (NASDAQ:WB) said it agreed to be acquired in a $15.1 billion all-stock deal by San Francisco-based Wells Fargo & Co., (NYSE:WFC). The merger agreement between the two banks includes all of Wachovia’s banking operations in a whole company transaction requiring no financial assistance from the FDIC or any other government agency.

Under the terms of the deal, which has been approved unanimously by the boards of both companies, Wachovia shareholders will receive 0.1991 shares of Wells Fargo common stock for every share of Wachovia, valuing the Charlotte, N.C.- based bank at about $7 per share. The transaction is based on Wells Fargo’s closing stock price of $35.16 on October 2, ‘08 which translates to a 79% premium for Wachovia’s shareholders over the stock’s Thursday closing price of $3.91. Wachovia has almost 2.2 billion common shares outstanding.

In conjunction with the deal, Wells Fargo expects to incur merger and integration charges of approximately $10 billion. To maintain its strong capital position, Wells Fargo intends to issue up to $20 billion of new securities, mainly common stock.

Robert K. Steel, President and CEO of Wachovia Corp. said:

Today’s [Friday] announcement creates one of the strongest financial firms in the world and is great for all Wachovia constituencies: our shareholders, customers, colleagues and communities. This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support. The market presence and composition of our businesses creates great potential for sustained stability and growth.

The combined company will have a strong presence in Charlotte, which will be the headquarters for the combined company’s East Coast retail and commercial and corporate banking business. St. Louis will remain the headquarters of Wachovia Securities.

Wells Fargo will now be catapulted from being just a predominately West Coast bank into a national institution with over a trillion dollars in assets, deposits of $787 billion, and over ten thousand branches.

The deal however, comes four days after Citigroup (NYSE:C) agreed to purchase Wachovia’s banking operations for $2.16 billion in a deal arranged by the FDIC. Citi is now demanding that Wachovia terminate the $15.1 billion takeover agreement announced Friday and abide by the terms of its earlier deal with the New York-based firm.

In a statement, Citigroup said:

Citi has substantial legal rights regarding Wachovia and this transaction. Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia. [Bloomberg]

For its part the FDIC issued a statement reiterating its stance:

The FDIC, said Chairwoman Sheila Bair, stands behind its previously announced agreement with Citigroup. The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.

It is important to point out this deal does not require help from the government. If Wells Fargo sees real value in Wachovia, it raises confidence in other banks as well. Let’s not forget the fact that only two months ago, CEO John Stumpf implied it was highly unlikely his company (Wells Fargo) would pursue a large East Coast rival. Confidence remains an element that must be restored at this point in order to get the financial system working again, and Friday's deal is definitely a step in the right direction.

Disclosure: None

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