Snit in the Citi on Wells’ unwelcome offer
With its stock down 18%, Citigroup is trying to keep its federally backed deal to buy Wachovia’s banking unit alive amid a competing offer Friday from Wells Fargo.
This past Monday, Citi seemed to have scored a major coup when it agreed to acquire Wachovia’s 3,300 branches for a mere $1 a share, or $2.16 billion.
The Federal Deposit Insurance Corp., which helped broker the deal, promised to cover any losses above $42 billion on Wachovia’s troubled $312 billion mortgage portfolio in exchange for $12 billion in preferred Citi shares and warrants.
The deal would have more than tripled Citi’s branch network domestically and added about $500 billion of deposits to its vaults.
In a stunning move, however, on Friday morning Wells Fargo offered to pay $7 a share for Wachovia and do the deal without government guarantees.
The government insisted it remains in Citi’s corner.
“The FDIC stands behind its previously announced agreement with Citigroup,” said the agency’s chairman, Sheila Bair.
“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.”
Citi demanded that Wachovia and Wells Fargo terminate their transaction, saying their deal represents a “clear breach” of an exclusivity agreement and constitutes “tortuous interference.”
Citi added that it has been providing “liquidity support” to Wachovia since Monday.
Still, investors clearly believe Wells Fargo will carry the day. Wachovia shares leaped to about $6.75 on Friday morning, suggesting a high degree of confidence that the Wells bid will prevail. Indeed, investors had a hunch that Wachovia would fetch a higher price than Citi’s $1 per share offer, since Wachovia’s stock closed Thursday at $3.91.
It isn’t clear how Citi would respond if it loses Wachovia, which would fill a major hole in its vast franchise. One possibility would be to acquire National City Corp., a struggling Cleveland-based bank that sports a network of 1,300 branches, largely in the Midwest, with about $100 billion of deposits.
Fox-Pitt Kelton analyst David Trone said he thought Citi will likely focus on resolving its own problems.
“We believe Citi will be on the sidelines waiting for the call from the Fed for assistance on bailouts, but not aggressively bidding on troubled franchises,” Mr. Trone wrote in a client note.
That would clearly be Plan B for Chief Executive Vikram Pandit, who seemed on the verge of one of banking’s great heists in the Wachovia deal.
But it would please ratings agencies who had threatened to cut Citi’s credit rating again had it acquired the bank.
Moody’s Investors Service had warned the merger would create integration challenges at a time when Citi’s asset quality “is being undermined by weakening consumer and commercial markets.”
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