Citigroup is vowing to take it to court Wells Fargo appears to be winner in Wachovia fight

Richard Craver

Oct. 10, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- The battle for Wachovia (NYSE:WB) Corp. appears to be over, with Wells Fargo and Co. (NYSE:GWF) (NYSE:JWF) (NYSE:WSF) (NYSE:WPF) (NYSE:WFC) emerging as the winner.

Citigroup (NYSE:C) Inc. called off negotiations yesterday, conceding the bank to Wells Fargo, but it promised to pursue damages in court for what it considers a breach of its exclusivity agreement with Wachovia.

"Although you never want to lose a corporate headquarters, this is overall good news for North Carolina and for Winston-Salem compared with a Citigroup ownership of Wachovia," said Tony Plath, a finance professor at UNC Charlotte.

"Charlotte will have the East Coast banking headquarters, and the wealth-management unit will now have significantly more customers to sell to west of the Mississippi, which should strengthen its operations and hopefully its presence in Winston-Salem."

Plath said that Citigroup's own balance-sheet worries ultimately kept it from raising its $2.2 billion deal for Wachovia, along with $95 billion in assumed debt and loan losses. That deal would have been worth about $1 a share to Wachovia shareholders.

By comparison, Wells Fargo's deal was initially valued at $15.1 billion in stock, or $7 a share, based on a share price of $35.16 on Oct. 2. Because Wells Fargo's share price has dropped, closing at $27.25 yesterday, the deal is likely worth less than $6 a share.

However, analysts said that with Wells Fargo in the driver's seat now to buy Wachovia, its share price is likely to bounce back somewhat today even if the Dow Jones industrial average continues its downturn.

"Citigroup tried to steal Wachovia at the 11th hour with a low-ball offer that Wells Fargo trumped," Plath said.

"Citigroup really wanted Wachovia's core deposits to build up its own shortfall, so essentially Citigroup needed Wachovia more than Wachovia needed Citigroup," he said.

Citigroup and Wells Fargo had been negotiating over the fate of Wachovia this week after their battle moved to both state and federal court over the weekend. Citigroup charges that Wells Fargo violated an exclusivity agreement it had with Wachovia. It is asking for $60 billion in damages from Wachovia, Wells Fargo and their boards of directors for interfering with its offer.

The merger is "simply an incredible fit that will result in an immensely strong, stable financial-services company that will carry on Wachovia's proud tradition of being one of the very best financial institutions in the world," Dick Kovacevich, the chairman of Wells Fargo, said in a statement.

The proposed combined bank will have $1.4 trillion in assets, $787 billion in deposits, 48 million customers and 10,761 branches. It would have the top market share in 17 of the 39 states in which it has branches.

"We look forward to completing our merger with Wells Fargo," Wachovia said in a statement. "We have always believed (it) is in the best interest of shareholders, employees, creditors and retirees, as well as the American taxpayers and it imposes no risk to the FDIC fund."

Analysts said that the Federal Reserve has been pressing Citigroup and Wells Fargo to negotiate a deal in which they split Wachovia's assets, particularly its branches, to avoid a long legal fight that could threaten Wachovia with insolvency.

Media reports said that Citigroup was trying to find a nonbank financial institution willing to take Wachovia Securities and Evergreen Asset Management, the parts of Wachovia that Citigroup didn't want.

The Federal Reserve, in a brief statement, said it would "immediately begin consideration of the filings submitted by Wells Fargo for approval to acquire Wachovia Corp."

Citigroup said in a statement that it was clear after four days of talks with Wells Fargo that no agreement could be reached.

A civil lawsuit is expected to be heard Tuesday in New York state court.

"Wells Fargo believes that the clause in the $700 billion bailout bill makes the exclusivity agreement invalid, while Citi believes that the agreement is valid because it was signed before the bailout bill was approved," Plath said, referring to a clause that says that no company can be prevented from buying all or part of a bank.

"You'll see them hash it out in court, but it likely won't be too costly for Wells Fargo whatever it is ordered to pay to Citi, if anything."

Citigroup said it is still willing to complete its deal for Wachovia as long it "limits the risk to Citigroup and generating value for its shareholders."

Joseph Gordon of Gordon Asset Management LLC, an investment-advisory company in Durham, predicts that Citigroup's legal actions will be resolved quickly.

"Citigroup is walking because they will get a cash settlement, and likely Wells will pay it in exchange for part of the Fed backstop Citi was going to get," Gordon said. "Getting a cash settlement enables them to move on and buy someone else. There are plenty of wounded bank ducks."

Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.

Newstex ID: KRTB-0222-28648736