Wachovia Now to Couple with Wells Fargo while Citi Sleeps

Four days after agreeing in principle to sell its banking unit to Citigroup, Wachovia signs a "whole company" deal with Wells Fargo.
Marie LeoneOctober 3, 2008

Just four days after agreeing in principle to sell its banking unit to Citigroup, Wachovia today announced a dramatic about-face, signing deal instead to be acquired in its entirety by Wells Fargo.

Emphasizing that the deal would take place “without government assistance,” Wells Fargo & Company and Wachovia Corporation signed a definitive agreement to merge in a $15.1 billion stock-for-stock transaction. The deal includes all of Wachovia’s businesses, including its securities and asset management units, and will require “no financial assistance from the Federal Deposit Insurance Corporation or any other government agency,” noted Wells Fargo in a statement released early Friday morning.

Citigroup did not immediately respond to CFO.com’s request for a comment.

The early-morning announcement pulls the plug on the tentative deal Wachovia reached with Citigroup four days ago. In that deal, Citi agreed to buy just Wachovia’s banking subsidiaries for $2.16 billion. Also, Citi was set to acquire more than $700 billion of assets of Wachovia’s banking subsidiaries and retail liabilities, and accept loss protection from the FDIC on $312-billion worth of mortgage-related and other Wachovia assets. The Citi transaction, like the Wells Fargo deal, was approved by both boards.

The sudden switch to Wells Fargo was likely prompted by the idea that Wachovia would not have to sever its banking unit from its other businesses, as was required in the Citi deal. As a result, Wells Fargo chairman Dick Kovacevich, commented on Friday that current agreement “avoids the complexity and unavoidable loss of value in trying to separate” the units.

Under the agreement, which was approved unanimously by the boards of both companies, Wells Fargo will acquire all outstanding shares of common stock of Wachovia, which means the San Francisco-based bank will own all of Wachovia Corporation, and all of its businesses and obligations, including preferred equity and indebtedness, plus all of its banking deposits.

A key to bolstering liquidity during the current credit crisis is the acquisitions of commercial bank deposits, which is a relatively stable source of cash. To maintain its “strong capital position,” Wells Fargo plans to issue up to $20 billion of new securities, mostly common stock, noted the statement.

Wells Fargo’s CFO, Howard Atkins, noted that “conservative assumptions” were used to evaluate the deal, adding that,” we only consider acquisitions that add to earnings per share not later than the third year after purchase and earn an internal rate of return of at least 15 percent.”

The acquisition, which requires approval of Wachovia shareholders and regulators, is expected to exceed Wells Fargo’s internal rate of return goal and add to its earnings per share during the first year of operations. However, merger and integration charges will add up to about $10 billion. Those charges include integration costs, write-downs, transaction charges, and credit reserves, said Wells Fargo.

From an accounting perspective, Wells Fargo will record Wachovia’s “credit-impaired assets at fair value.” The assets of the combined company are currently valued at $1.42 trillion, with $812 billion of that coming from Wachovia. Deposits for the merged entity will total $787 billion, and assets under management in mutual funds will total $258 billion. Currently, the two banks have 280,000 employees — 160,000 who work at Wells Fargo — and a total of 10,761 retail outlets.

When the deal is signed, Wachovia shareholders will receive 0.1991 shares of Wells Fargo common stock in exchange for one share of Wachovia common stock. The transaction, based on Wells Fargo’s closing stock price of $35.16 on October 2, 2008, is valued at $7.00 per Wachovia common share, bringing the deal value to just over $15 billion.

The East Coast headquarters for the combined company’s retail, commercial and corporate banking business will be located in Charlotte, while Wachovia Securities will be remain in St. Louis. Also, three members of the Wachovia Board will be invited to join the Wells Fargo board after the deal is finalized.

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