Wachovia ( WB) may not have seemed like something worth fighting for when federal authorities subsidized a deal to Citigroup ( C) on Monday, but that all changed with Wells Fargo's ( WFC) surprise $15.1 billion bid Friday. Wells Fargo's accepted offer is clearly the better deal for shareholders, employees and U.S. taxpayers, but Citi is threatening legal action over Wachovia's breach of an exclusivity agreement. Some industry pundits wonder whether Citi should sweeten its bid, or just walk away from the deal. "Citi is crazy," says Cassandra Toroian, the president and chief investment officer of Bell Rock Capital, which has a small position in Wachovia. "The legal fees and time on this is not something they should be bothering with. They need to go find another deal." San Francisco-based Wells Fargo said early Friday that it planned to purchase all of Wachovia in a stock-for-stock bid totaling $15.1 billion, or $7 a share. The deal is remarkably better for shareholders than Citi's offer just a few days earlier, in which it offered to purchase just the firm's banking operations for $2.16 billion. Citi's deal also needed the help of the Federal Deposit Insurance Corp., which agreed to take on most of the risk of Wachovia's loan portfolio. Wells Fargo's deal is completely unassisted. Citi said in a statement Friday morning that the Wells Fargo deal constituted a "clear breach of an exclusivity agreement" Wachovia had entered with Citi and demanded a halt to the new transaction.
"Citi was negotiating in good faith and nearly completed the definitive agreements required to consummate the Citi/Wachovia transaction that was announced on Monday," the bank said in a statement. "The value of the Citi agreement to Wachovia shareholders was substantially in excess of Wachovia's closing price on Thursday, Oct. 2. Citi has also been providing liquidity support to Wachovia Bank since Monday's announcement." Wells Fargo and Wachovia danced around the issue on a conference call Friday. "We think that this deal is solid," Wells Fargo Chairman Dick Kovacevich said. "We're not aware of any merger agreements that had been consummated at the time
with Citi . ... We feel very confident that this transaction has been done appropriately." Wachovia CEO Robert Steel said on the call he could not speak to the issue on whether or not Wachovia had a binding agreement with Citi, prior to the Wells Fargo's deal. A Citi spokesman declined to comment regarding its next move. A Wells Fargo-Wachovia merger makes a lot of sense for the two companies, says Bart Narter, the senior vice president of Celent's banking group. "Wachovia and Wells Fargo are nearly perfect complements to one another, with strengths on both the East and West Coasts, respectively," Narter says. "Wachovia's recent acquisition of Golden West gives it an overlapping branch footprint in California and both also have major activities in Texas. Other than these two very competitive markets, the two banks are the yin and yang of retail branch banking."
But with Citi expressing displeasure over the announcement, "
w e can expect that there will be further battles between these giants as the great bank consolidation trend continues," Narter adds. A Citi-Wachovia combination would have given the New York-based financial titan the kick start its struggling domestic retail franchise needed to be competitive against other large players including Bank of America ( BAC), JPMorgan Chase ( JPM) and Wells Fargo. Wachovia has more than 3,000 branches mainly on the eastern seaboard and in California and Texas, among other states. Citi had planned to fold its U.S. retail bank -- about one-third of the size -- into the Wachovia platform, it said. It also would have provided some much-needed stable funding and liquidity source through Wachovia's deposit base. Citi had said that it would have had more than $600 billion in deposits just in the U.S. -- a 9.8% market share -- and more than $1.3 trillion globally. "This combination creates a dominant U.S. franchise," Citi CEO Vikram Pandit said on Monday. Still for all the scuttled deal's positives, it may not be worth the fight for Citi to pursue legal action or raise its bid -- if it is even allowed to, given that the FDIC was a partner in the original deal. Wells Fargo, according to presentation materials, will now become the nation's largest bank with 6,675 stores, $1.4 trillion in assets and close to $800 billion in deposits, surpassing JPMorgan Chase, even with the addition of Washington Mutual, which is took over last month after federal regulators seized the ailing Seattle thrift.
The deal is a "compelling opportunity" for Wells Fargo, given the expanded footprint on the East coast and added complements in its existing footprint, writes Andrew Marquardt, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller. Marquardt's colleague David Trone said Citi "loses an attractive, accretive deal, complete with government-assistance on the tail-risk in Wachovia's asset quality," according to a separate note. "The deal was struck at the 11th hour and clearly had not been formally completed." Trone believes that a "key problem" in the original Citi-Wachovia deal was the "orphaning of Wachovia's attractive retail brokerage franchise," since many of its "financial advisors reside in the Wachovia bank branches," he writes. Additionally, "Citi's own collective of problem assets and operational challenges make it likely that any future deal will have to be very attractive strategically and immediately accretive." A deal with Wachovia would likely have detracted Citi from continuing its mission to shed $400 billion in non-core assets and businesses from its balance sheet, despite Pandit's reassurances on Monday. "Nothing is going to take our eye off the ball in getting fit," Pandit said. "We're committed to the same things we talked about" in terms of expense reduction, business repositioning and asset reduction. Christopher Mutascio, an analyst at Stifel Nicolaus, says any counteroffer from Citi for Wachovia will be difficult. "Citi was getting $24 billion of Tier-1 capital from the FDIC in its government-assisted deal for the banking operations of Wachovia," he writes in a note. "We believe that if Citi needed Fed assistance to do the original deal, it may not have the capacity to up the ante and counter the Wells Fargo offer. And, clearly from a Wachovia shareholder perspective the Wells Fargo offer is a better deal." Toroian echoed Mutascio's thoughts. "They couldn't get it done without federal assistance. A sweetened bid only works if it's without strings and I don't think they are in good enough shape to do that," she says. "Citi has not done a deal in a long time, let alone one of this magnitude. ... Wells Fargo is now going to be a very major player in the U.S. national banking market -- good for them for stepping up and doing this."