Wells Fargo goes for Wachovia

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Star Tribune (Minneapolis)

(MCT)

MINNEAPOLIS -- In a single stroke, Wells Fargo & Co. achieved what many thought impossible in recent weeks: It rescued a troubled bank without putting billions of taxpayer dollars at risk.

Late Thursday, in a dramatic turn of events, Wells Fargo's board of directors approved a $15.1 billion takeover of Charlotte, N.C.-based Wachovia Corp., in a deal that requires no government assistance and scuttles a federally backed deal between Wachovia and Citigroup.

Citigroup threatened legal action Friday and may sweeten its bid for Wachovia. That could touch off a takeover battle for a bank that, just a week ago, appeared on the verge of failure and was desperate for government assistance.

"This is a huge confidence-builder," said Derek Ferber, a bank analyst with SNL Financial in Charlottesville, Va. "It shows that private banks can broker their own deals without the government's help."

The deal, which was approved by boards of both banks, also marks a dramatic turning point for San Francisco-based Wells Fargo, which just a week ago appeared to have given up on its quest for Wachovia. Wells Fargo had almost reached a deal for the bank last weekend, but chairman Dick Kovacevich said the bank didn't want to rush into a deal until it had completed all of its due diligence. So a week after Citigroup agreed to pay about $2.1 billion for Wachovia's banking operations only, Kovacevich swooped in and offered more than seven times that sum for the entire company.

Because Wells Fargo's shares closed down 60 cents Friday, the value of Wells Fargo's all-stock offer for Wachovia has fallen from its initial $7 a share to $6.88 a share. That's a 76 percent premium to Wachovia's closing share price of $3.91 on Thursday. Citigroup's offer was about $1 a share.

The biggest difference between offers is that Wells Fargo's bid does not include government assistance. Citigroup had agreed to shoulder up to $42 billion in losses on Wachovia's $312 billion pool of loans; while the Federal Deposit Insurance Corp. would absorb any losses beyond that.

"It's still a good deal for Wells Fargo and a great deal for Wachovia," said Morningstar analyst Matthew Warren.

The deal means Wells Fargo goes from being a large regional bank with a deep presence in the Midwest and West to a truly national institution with 6,675 branches and more than $1.4 trillion in assets -- behind only Bank of America, Citigroup and J.P. Morgan Chase & Co.

Wells Fargo & Co. chairman Dick Kovacevich said in a statement the deal was "a superior value to the previous offer."

But several bank analysts who cover Wells Fargo said the bank may be saddling itself with a large loan portfolio loaded with risky mortgages that could go sour if the economy worsens. Some questioned the wisdown of proceeding without a government backstop, particularly when one was available to Citigroup.

Ferber of SNL Financial is concerned that Wells Fargo, which has over 1,000 branches in California after a 2006 acquisition there, is now "doubling down" on a state that has been particularly hard hit by the housing slowdown. "Wells Fargo already makes a lot of home equity loans in that state," he said. "It's a bit troubling."

Wells Fargo said Friday it expects to take a $74 billion hit on Wachovia's $498 billion loan portfolio.

The head of the FDIC said the agency is standing behind the Citigroup agreement, but that it is reviewing all proposals and will work with the banks' regulators "to pursue a resolution that serves the public interest."

Citigroup, which demanded that Wachovia call off its deal with Wells Fargo, said its agreement with Wachovia provides that the bank will not enter into any transaction with any party other than Citi or negotiate with anyone else.

When asked if Citigroup would seek a court injunction to halt a Wells Fargo-Wachovia deal, a spokeswoman for Citigroup said, "We are exploring all options." She declined to comment further.

The fact that boards of both Wells Fargo and Wachovia have already approved the deal make a bidding war unlikely, but some industry analysts are still not ruling out that possibility. Citigroup has also been hard hit by loan losses, and declining investor confidence in its financial strength has caused its stock to plunge by nearly a third since April. For Citigroup, a deal with Wachovia represents a prime opportunity to gain new deposits and bolster its balance sheet.

Citigroup "could have really used those deposits," said analyst Warren. "It wouldn't be surprising if they returned" with a new offer.

By Chris Serres

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