SunTrust

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was dealt yet another blow in its ongoing bid to acquire

Wachovia

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Monday when a proxy advisor backed a friendly bid from rival

First Union

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The report by the influential advisory group

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Insitutional Shareholder Services

, or ISS, concludes: "On balance, we believe that Wachovia shareholders would be best served voting in favor of the pending First Union transaction." ISS set out three major issues for Wachovia shareholders to consider, including the "short-term economic premium" of SunTrust's stock exchange offer, the long-term strategic benefits of merging Wachovia with SunTrust and whether the First Union deal involved such "irregularities" or "governance improprieties" that shareholders should reject the agreement.

The report wasn't unexpected. But it creates yet another hurdle for SunTrust as it tries to win over Wachovia shareholders prior to an Aug. 3 shareholder vote. The report comes just two days after a

North Carolina judge decided to uphold the friendly

merger deal announced by First Union and Wachovia's friendly

merger in April. First Union will undoubtedly use the ISS findings to support its case as both banks wage an increasingly heated public relations war.

ISS questioned the sustainability of SunTrust's modest premium. Offering to exchange 1.081 of its shares for each share of Wachovia, SunTrust is currently valuing Wachovia at $73.46 a share. First Union's two-for-one stock swap represents a value of $69.60 for each Wachovia share. The spread between the two offers currently sits at about 5.5%, considerably narrower than when SunTrust first made its unsolicited offer in mid-May. Subsequent unease about how a merger battle would dilute SunTrust's stock has depressed the value of the SunTrust bid from its initial 17% premium over First Union's. "It is not clear how sustainable even today's modest spread is," said the report.

In questioning the strategic merits of the rival suitors, ISS concluded that it is "far from clear that one transaction is a 'sure thing' and the other a sure loser." But it took care to point that First Union "appears to have learned" its lessons from its past difficulties with failed acquisitions, one of the sore spots to which SunTrust and other critics of the First Union offer have returned time and again.

Reacting to the report, a SunTrust spokesman says ISS "couldn't be more wrong in its conclusions. They bought lock, stock and barrel what we believe to be a flawed story." The spokesman went on to say the report is "just a recommendation," and that the institutional shareholders at whom it is aimed are free to reject it.

Not surprisingly, a First Union spokeswoman was more sanguine. "We welcome this third party recommendation, which reflects an understanding of the compelling strategic and economic benefits of our merger," she said.

The three banks' stocks were little changed on the news. Shares of Wachovia lost 20 cents to $69.84, SunTrust shed 60 cents to $67.90 and First Union fell 26 cents to $34.74.