SunTrust Bid Still Looking Better to Wachovia Holders

SunTrust's (STI) surprise bid for Wachovia (WB) has some investors ready to ignore First Union (FTU), no matter how loudly it talks up its offer.

Tuesday morning First Union issued a press release outlining the merits of its merger with Wachovia, agreed to last month in a stock swap then valued at $13 billion and now valued at slightly less, given the retreat in First Union shares. But the SunTrust bid, unveiled Monday, remains about 7% richer and offers a number of other advantages, including SunTrust's superior management and the promise of fewer culture clashes.

"On the face of it, the SunTrust deal is superior to First Union," says Walnut Creek, Calif.-based Scott Edgar, who runs the roughly $760 million Sife Trust fund, which focuses on financial stocks and holds about 300,000 Wachovia and more than 410,000 SunTrust shares. "The currency of SunTrust is something we'd be more favorable with going forward," adds Edgar. "I don't even know the last time [SunTrust] wasn't in the portfolio. We haven't been owners of First Union for quite some time."

"I think SunTrust has made a very compelling offer," says Frank Barkocy, director of research at hedge fund Keefe Managers. "If you look at the price, the dividend that is being offered, the similarity of their cultures and the fact that the deal is not wholly dependent on excessive cost cuts, SunTrust is the better deal for Wachovia."

Still, "I think this is going to go for some time," Barkocy says of the dispute over Wachovia. "The stocks could be subject to volatility depending on rumors, depending on what First Union might do." So the fund manager took the opportunity to exit positions in both SunTrust and Wachovia in recent days, by covering a short position in Wachovia and "phasing out" the SunTrust holding. "We felt there were better situations to play not based on volatility." (His fund has no position in First Union.)

First Union faces a dilemma now that SunTrust has stepped into the bidding picture. Just a month ago, First Union was ready to snap up Winston-Salem, N.C.-based Wachovia for $13 billion, with virtually no premium attached. But Monday, SunTrust, long considered a prime merger partner for Wachovia, jumped into the fray with a financially superior offer. Now First Union must decide whether it will risk angering shareholders, whom it has long sought to convince that it is mending its freewheeling ways, by raising its offer. But if it sticks to its current offer, it stands to lose Wachovia.

SunTrust says it was near a deal with Wachovia last December when Wachovia pulled out. It looks like SunTrust is determined not to let Wachovia slip away this time around. Shares of SunTrust rose 8 cents to $60.08, Wachovia fell 2 cents to $64.73 and First Union edged up 4 cents to $30.62 in regular session trading Tuesday.

"I don't necessarily look for First Union to come back" with a superior bid, says Barkocy. "If shares of SunTrust do hold up or even tick up a bit from here, it would probably make the bid pretty compelling."

"We're leaning toward the SunTrust story," says Edgar. If a SunTrust-Wachovia deal does happen, the combined company will be the largest holding in the fund's portfolio.

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