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Wachovia's Remnants Hard to Value

Still, shares nearly double a day after Citi's acquisition of the company's banking operations.



shares nearly doubled Tuesday as investors perhaps saw some value in the businesses left behind after



acquisition of its banking operations.


shares dropped 90% on Monday following news that the Federal Deposit Insurance Corp. brokered a hurried deal to sell the company's retail bank, corporate and investment bank and wealth management business to Citi for $2.16 billion. Wachovia will retain its Wachovia Securities, the nation's third-largest brokerage firm, and Evergreen Asset Management.

Analysts say Wachovia has so far offered little perspective on what would become of the rest of the company.

"The biggest question on investors' minds is what is the remaining value of that company -- what is it worth and what are the prospects of the remaining business operations," says Todd Hagerman, an analyst at Credit Suisse. "They just haven't given us a lot of detail. We don't have any sense of the capital structure."

Andrew Marquardt, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller, wrote in a note Tuesday morning that "

we found the disclosure on this deal to be one of the worst we can recall of a major transaction."

"With such little detail and no communication yet by Wachovia, we have made several assumptions across three different approaches to arrive at franchise value for remaining Wachovia shareholders of about $1.40 a share," but that could range widely from a negative $2.13 a share upward to $5.77 a share, according to the note.

Marquardt adds that Wachovia's remaining businesses have "much uncertainty" surrounding them, including near- and long-term earnings power and the risk of client attrition for its retail brokerage and asset-management units, especially with Evergreen.

On the same day Wachovia shares plunged, the markets overall tanked. The

Dow Jones Industrial Average

fell nearly 800 points following the news that the U.S. House of Representatives failed to pass the bailout proposal in which the government would purchase roughly $700 billion in troubled assets, among other things. Stocks recouped much of those losses on Tuesday following renewed optimism about the prospects for a new bailout package.

Wachovia's stock closed up 90% to $3.50 on Tuesday. Wachovia also issued a statement slightly after midday saying the company "remains well capitalized" following Monday's sale announcement.

The holding company is supporting its operating subsidiaries, it said.

"Wachovia is in a strong position to provide credit support and overall capital backing to key businesses, including retail brokerage, asset management, retirement services and capital markets," it said. "In addition, the Federal Reserve Bank stands ready to provide liquidity as needed."

The Charlotte-based company also noted that Citi's use of government assistance in connection with its acquisition "is not dependent on the financial services relief plan legislation the U.S. Congress has been considering."

Wachovia spokeswoman Christy Phillips-Brown says the statement was meant as "a reassurance" to investors that the remaining company does indeed have adequate capital.

"Obviously this

deal came together fairly quickly," she says. "We are working towards providing more information," to various investors and other parties.

Phillips-Brown added that Wachovia plans to hold a conference call in the near future, but no date has been set yet.

Citi issued its own statement on Tuesday saying the company was "committed to the orderly consummation of the transaction, including the viability of the businesses that will remain with Wachovia Corp." Citi "continues to do business on normal terms with both the businesses to be acquired and those that will continue in Wachovia Corp."

A Citi spokesman declined to comment further.

Going forward, Jefferson Harralson, an analyst at Keefe Bruyette & Woods, writes that Wachovia will most likely sell the remaining assets "as soon as practical."

"While earnings are difficult to estimate, we believe the new company will have a hard time earning more than its $750 million preferred dividend -- leaving common shareholders with little value," he writes in a note.

"On a rough sum-of-the-parts basis, we show that common shareholders could have as much as $1.94

a share in value, but significant uncertainty exists with what the ultimate sale prices could be of these businesses," Harralson writes. "Either way, we believe that while the new company will have little debt, the common shareholders will be most likely left with little value."

The FDIC stated that Wachovia did not fail. Citi will take the hit for up to $42 billion of losses on $312 billion of Wachovia loans identified as potentially troubling, while the FDIC will take responsibility for additional losses. Citi granted the FDIC $12 billion in preferred stock and warrants for assuming the risk.