Germans Aren't Courting Wachovia, Analysts Say

Word in Europe has it that the bidding war for Wachovia (WB Quote) may soon go global. But banking experts and Wachovia itself were throwing cold water on that notion Monday.

A number of German news reports this weekend suggested that Deutsche Bank, which has made no secret of its desire to expand in the U.S., was considering entering the bidding fray for Wachovia. The reports, picked up Monday in the weekly Der Spiegel, included word that Wachovia had asked Deutsche Bank to act as a white knight. First Union (FTU Quote) and SunTrust (STI Quote) currently are locked in a nasty battle for control of Wachovia.

Wachovia wasn't encouraging any of that talk. A spokesman for the bank declined to comment directly on the speculation, citing company policy. But he stressed that "Wachovia has a binding merger agreement with First Union and is on track to close the merger as planned." Deutsche Bank didn't return calls seeking comment.

Fox Guarding the Hens

Meanwhile, a number of analysts were somewhat mystified by the rumors. The problem, as they see it, is one of timing: Jumping into the ongoing fray between First Union and SunTrust right now would be unwise for Deutsche Bank -- particularly with CEO Rolf Breuer preparing to step down in 2002.

"Clearly Deutsche wants the presence in banking in the U.S. But I don't know why they would step in at this point," says Richard Bove, banks analyst at Raymond James in St. Petersburg, Fla., citing the uncertainty and risk surrounding the ongoing proxy fight. "It doesn't make sense."

Bove believes a more realistic notion might involve Deutsche waiting until after the Wachovia shareholder vote, scheduled for Aug. 3. Depending on whether Wachovia shareholders ratify the negotiated First Union deal, which is worth about 3% less than SunTrust's unsolicited bid, Deutsche could then "bid for the whole thing." As the second-largest bank in the world, the company certainly has the money to outbid either suitor, he says.

But the dust must settle before anything happens. "Why [Deutsche] would seek to get in with Wachovia at this juncture doesn't seem to make any sense," says Bove, whose firm has no underwriting relationship with any of the banks.

The Underwriting

It's important to note that talks between Deutsche and Wachovia may have taken place prior to the the deal with First Union that Wachovia agreed to in mid-April. (Atlanta-based SunTrust, which has also talked with Wachovia in the past, soon after brought a richer, rival bid to Wachovia, which rejected the offer.) Prudential banks analyst Mike Mayo says the current speculation about a Deutsche Bank bid raises the question of "what happened before Wachovia had something in place" with First Union. But even so, Mayo is skeptical of a Deutsche/Wachovia deal. "I don't think Wachovia will end up with Deutsche," he says, "even if First Union doesn't go through with this." (Prudential hasn't done recent underwriting for any of the banks.)

SunTrust declined to comment, while a First Union spokeswoman said that company's "integration plan with Wachovia is moving ahead. We have a signed merger agreement for a merger of equals with Wachovia."

Not everyone was ruling out the notion of a competing bid from Deutsche. Gimme Credit analyst Kathy Shanley, who pens a daily newsletter on debt, wrote today that "Deutsche Bank is under pressure to do a deal, following last year's failed attempt to buy Dresdner Bank." She also noted that Deutsche might not be shy about bringing "cash to the table."

Readiness on Deutsche's part to raise the stakes would be key because SunTrust has said it will not raise its bid from its current offer. But Bove notes that while Deutsche might be willing to pay a premium to acquire Wachovia, the price can't become so expensive that the deal is no longer attractive or efficient. "Which company has the greatest ability to effect this transaction?" he asks. "I don't think First Union is going to be dissuaded," from merging with Wachovia.

Based on today's closing prices, SunTrust's bid values Wachovia at $69.18 a share, or about $14.5 billion, while First Union's offer values each share of Wachovia at $67.52, or $14.2 billion. When SunTrust first made its offer on May 14, the bid was about 17% better than First Union's. But SunTrust's stock has fallen as shareholders fretted about the risk of a takeover, and its bid now represents a mere 2.5% premium to First Union's.

In Monday trading, First Union fell 2 cents to $33.76. Wachovia lost 20 cents to $68.82, while SunTrust rose 45 cents to $64.