Coke Holdings Could Have SunTrust Smiling in Wachovia Battle

Analysts think the Atlanta bank needs to boost its bid to win the day.
By Eileen Kinsella ,

SunTrust's (STI) - Get Report thirst for a deal may have it reaching for a Coke (KO) - Get Report.

Atlanta-based SunTrust and Charlotte, N.C.-based

First Union

(FTU)

have been battling for control of

Wachovia

(WB) - Get Report

for nearly a month. During that time, the 17% premium that SunTrust's unsolicited offer initially held over First Union's negotiated deal has nearly evaporated.

Investors and analysts say SunTrust's challenge now is to sweeten its bid without souring its share price. That could prod the Atlanta bank to consider selling some of its holdings in longtime client Coke to raise cash.

For its part, SunTrust has said it doesn't intend to raise its all-stock bid, which currently values Wachovia at $67.88 a share. But because First Union's agreed-upon offer is now valued nearly at par with SunTrust's, market observers say SunTrust will be unlikely to win the day without offering Wachovia shareholders more. And given the damage SunTrust stock has taken since the bank entered the fray, simply issuing more stock isn't an option.

SunTrust could "swing things in a hurry" by boosting its bid by 10%, says Guy Wyser-Pratte, CEO of New York investment consulting firm

Wyser-Pratte

. "SunTrust doesn't want to put additional pressure on their shares. Perhaps they can restructure their offer in a way that people can see more value."

Keefe Bruyette & Woods

bank analyst Marni Pont O'Doherty agrees SunTrust will have to come up with something other than more stock to seal the deal. "If you raise your bid and the stock trades off, it hurts the exchange ratio," she says. "You've just lost your ability to come back."

Inching Back
SunTrust recovering after postbid plunge

Given the tight spot SunTrust is in with respect to its recently weak stock price, a number of observers have been eyeing the bank's substantial stake in Coke as a potential sweetener.

At the end of the first quarter, SunTrust owned 131 million Coke shares with a value of about $6 billion. "SunTrust's flexibility comes from the fact they could basically monetize the Coke stock," says Jennifer Thompson, banks analyst at

Putnam Lovell

. (Thompson rates SunTrust a buy and First Union and Wachovia hold. Her firm has no underwriting relationship with these banks.)

Wyser-Pratte says SunTrust may have a couple of options open to it if it seeks to restructure its offer, such as issuing convertible preferred shares that could be exchanged for Coke shares later on.

In mid-April, First Union agreed to a $13 billion stock swap with Wachovia. Then, on May 14, SunTrust made an unsolicited offer worth about $13.5 billion. But SunTrust shares tumbled, dropping 7% the day of the offer, as investors fretted about the risks involved in a hostile takeover bid. Now, SunTrust's offer is worth just 1% more than First Union's. Wachovia shareholders are to vote on the First Union deal Aug. 3.

Because it and Wachovia have agreed to merge, First Union has the "inertia advantage," says Wyser-Pratt, who was one of four featured speakers on a conference call hosted by

Prudential

banks analyst Mike Mayo on Thursday to discuss the competing bids. Even so, given the increasingly heated environment, "We think that bidding still goes higher," says Mayo, who rates all three bank stocks hold.

If SunTrust does end up winning Wachovia with a higher bid, the bank will likely toast its success with Coke.

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