Banking analysts expect

First Union

(FTU)

to return Monday's fusillade from

SunTrust

(STI) - Get Report

in the battle for

Wachovia

(WB) - Get Report

. But don't expect another round to change the outcome.

Indeed, SunTrust, with its unsolicited bid, currently valued at $13.5 billion, gained a lead over First Union, which last month offered a financially inferior package for Wachovia. And while analysts don't expect First Union to quit without a fight, SunTrust's superior reputation and the queasiness of First Union shareholders to pay more likely will land Wachovia in the hands of Atlanta-based SunTrust, observers say.

Back and Forth

Putnam Lovell

banks analyst Jennifer Thompson believes the bidding could get pricey, though she expects it to be short-lived. Thompson says she expects there will be "one round of counter-offers with bidders possibly throwing some cash into the pot." Thompson says if either bidder adds more stock now, "it's going to be dilutive." Her firm has no banking relationship with First Union, SunTrust or Wachovia.

"SunTrust is a much more compelling offer," says Thompson. "It makes more sense strategically than First Union. It certainly gives them more scale in underrepresented, high-growth markets." She said SunTrust doesn't have the kind of revenue-growth challenges that have weighed on First Union in recent quarters.

Based on Monday's close, SunTrust's offer of 1.081 shares for each share of Wachovia's stock values each share at about $64.86. That represents about a 6% premium to the implied current value of First Union's 2-for-1 stock-swap agreement last month. SunTrust's shares dropped $4.71, or 7.4%, to $60 during trading Monday.

Richard Bove, banks analyst with

Raymond James

in St. Petersburg, Fla., believes First Union will have to pony up $75 per share in cash and stock to carry the day. (He rates SunTrust and First Union strong buy and Wachovia market perform.) His firm has not performed underwriting for any of the three firms.

SunTrust highlighted the strength of its bid today, as well as its decision to increase its dividend to $2.22 a share, so that in combination with the shares offered, Wachovia shareholders would continue to get the same dividend they were used to, unlike under the First Union deal. Also, given that SunTrust currently has no presence in the Carolinas, a SunTrust-Wachovia deal would have less overlap and fewer job cuts than a deal with First Union. SunTrust estimated 4,000 positions would be eliminated, as compared with 7,000 under a First Union takeover.

"It sets up an interesting intellectual exercise," Bove said. What SunTrust is trying to do is get Wachovia shareholders to look at the respective track records of SunTrust compared with First Union and select a management team based on who is likely to represent the most consistent earnings-per-share growth going forward. "The offer First Union will make is 'We'll give you more now,'" says Bove. Bove says if First Union does wind up paying $75 a share in cash and stock, it represents 15 times earnings. First Union "had a sweetheart deal. Now that deal is gone," he says.

In a statement this afternoon, First Union said it remained committed to closing the deal but didn't go beyond the previously negotiated terms. And First Union, a bank that has only started to recover from a series of badly botched acquisitions, might not be quite so eager to stick its neck out this time. For its part, Wachovia said it will meet to review SunTrust's offer soon and said it requires no immediate action on the part of Wachovia shareholders.

Many industry experts were taken aback when historically conservative Wachovia agreed to a then-$13 billion takeover offer from freewheeling First Union just last month. Perhaps no one was more surprised than SunTrust, which today in a conference call was surprisingly candid about merger discussions it had held with Wachovia late last year. SunTrust called First Union's offer "inferior in virtually every respect."

SunTrust and Wachovia had been scheduled to announce a merger on Dec. 18. According to SunTrust, a little more than a day before both boards were to meet, Wachovia called to terminate the discussions, citing "alleged unresolved wealth management" issues. "As you can imagine, on the morning of April 16, we were perplexed and dumbfounded," said SunTrust, referring to the date of the First Union-Wachovia announcement.

SunTrust took issue with analysts who suggested during Monday's conference call that the offer is hostile. "We are very clear that the offer is competing and equally clear that it is unsolicited. The hostile bid was made on April 16 with no premium and less dividend. To the extent there is a hostile bid, it's not ours," SunTrust said.

SunTrust estimates that under its offer Wachovia shareholders would retain about 44% ownership of the combined company, as opposed to about 30% ownership it says they would have under the First Union offer. Yet it doesn't appear SunTrust is feeling as generous about sharing power after being spurned. In discussing board membership and management structure, SunTrust said talks in December had focused on an equal number of SunTrust and Wachovia members. But when asked about the composition of the board today, SunTrust said it probably would not be equal and "might bear some resemblance to ownership" on its part.

And when

Ryan Beck

analyst Nancy Bush asked what name a merged SunTrust-Wachovia would assume, a SunTrust spokesman replied: "Again, with respect to December, we had agreed to maintain the Wachovia name. This is not December and this is SunTrust."