Citigroup, Wells Fargo square off in a winner takes Wachovia duel

Earlier this week, Citigroup said it had made successful a government-backed bid to acquire troubled bank Wachovia. However, after lying low throughout the week, Wells Fargo said on Friday that it has signed a definitive agreement to buy Wachovia in an all-stock deal worth $15.1 billion, a bid which, if successful, would catapult it into the big league of national consumer banks.

According to sources close to the development, Citigroup, shocked by Wells Fargo's move has demanded that the transaction between Wells Fargo and Wachovia be called off or Wells Fargo faces the risk of a legal action as Citigroup had an exclusivity agreement with Wachovia and had been providing support to the latter since it announced the deal on Monday.

Wells Fargo executives, however, said in a conference call that they had been in talks with Wachovia before the Citigroup deal was announced, and had looked at data that Wachovia offered, but did not talk to the bank after the Citigroup deal was made public.

"This deal creates one of the strongest financial firms in the world and is great for all Wachovia constituencies: our shareholders, customers, colleagues and communities. This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," said Robert Steel, president and CEO, Wachovia, after its board approved Wells Fargo's offer.

However, Citigroup has made it clear that it would have none of it. "Citi has substantial legal rights regarding Wachovia and this transaction. Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia," the bank said in a statement.

"Any such agreement between Wachovia and Wells Fargo is illegal," said Vikram Pandit, chairman, Citigroup. "We continue to vigorously pursue Citigroup's interest and rights in completing this transaction."

Brushing off Citigroup's threats of legal action, Wells Fargo chairman Richard Kovacevich said, "We're confident that this deal goes through."

"The taxpayer doesn't pay a penny," he said, as Well Fargo's offer does not depend on any financial assistance from the Federal Deposit Insurance Corp (FDIC) or any other government agency.

"We get sued all the time and many times the suits are meritless," Kovacvich said, adding that the bank's lawyers are looking into the matter.

According to Kovcevich, no merger agreement had been consummated between Citgroup and Wachovia at the time Wells Fargo had announced its offer. "We feel very confident that this transaction (between Wells Fargo and Wachovia) has been done appropriately and will continue and be consummated. We think that this deal is solid," he said.

The top executive of San Francisco-based bank said Well Fargo's offer reflects the true value of Wachovia. "It (the offer) provides superior value compared to the previous offer (of Citigroup) to acquire only the banking operations of the company," Kovacevich said. "Wachovia shareholders will have a meaningful opportunity to participate in the growth and success of a combined Wachovia-Wells Fargo that will be one of the world's great financial services companies."

Wells Fargo said it would acquire all of Wachovia's businesses, preferred equity and banking deposits. "We are combining the industry's number one ranking customer service culture of Wachovia with the industry's number one sales and cross-selling culture of Wells Fargo. The best in service and the best in sales, an unbeatable combination," Kovacevich said.

"Wachovia's brokerage and asset management businesses, which would have been left behind in the prior (Citigroup) proposal, are tightly interwoven with Wachovia's core banking business - and this (Wells Fargo) agreement avoids the complexity and unavoidable loss of value in trying to separate them, which would have disrupted Wachovia's team members and customers," he added.

The FDIC, which had helped broker Citigroup's $2.16 billion offer, said it is reviewing Wells Fargo's bid, which is better than Citigroup's and would not require government financial support. Till then, Sheila Bair, FDIC chairman, said, it would stand "behind its agreement with Citigroup."

According to analysts, the Wachovia deal would have helped Citigroup firm up its presence in the US as a major retail bank.

However, analysts said, Wachovia would also strengthen Well Fargo's network presence in the East Coast.

While Citigroup had planned to sell $10 billion of common equity as part of its acquisition, Wells Fargo said it would raise up to $20 billion, mainly of common equity, to maintain its capital position. It said it expects to incur merger and integration charges of about $10 billion and over time, it expects to write the assets down by $32 billion.

"For Citigroup, this is a real loss ... This was a deal that was going to save them as much as it was saving Wachovia," said Cassandra Toroian, chief investment officer at Bell Rock Capital in Paoli, Pennsylvania.

"We can expect that there will be further battles between these giants as the great bank consolidation trend continues," said Bart Narter, a consultant at Celent.

"Wachovia and Wells Fargo are nearly perfect complements to one another, with strengths on both the East and West Coasts, respectively," he added.

Winning the Wachovia branches would have helped Citi bolster its relatively weak network of US branches, which number about 1000 compared with Wachovia's 3300 and Wells Fargo's 3400.

Meanwhile, in a joint statement, bank regulators at the US Federal Reserve and the Office of the Comptroller of the Currency, said, "The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability."

Analysts feel, barring legal hurdles, if any, the regulators may favor Wells Fargo's bid as it is one of the few major US banks that has remained consistently profitable during the ongoing credit crisis, while Citigroup has already posted more than $17 billion of net losses in the last three quarters.

Lawyers are divided over whether Citigroup's claims are strong.

According to Morton Pierce, chairman of the mergers and acquisition group at law firm Dewey & LeBoeuf, the fact that Citigroup had signed an exclusivity agreement with Wachovia and had been providing it support throughout the week could help it get a favorable decision in a court of law. "Those are clearly strong facts on Citi's side," Pierce said. Dewey & LeBoeuf is not representing any of the parties in the transaction.

However, Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell, thinks otherwise.

"I'm still not convinced that Citigroup can force this sale to happen," Nowicki said. "Even if there was some sort of document signed between Wachovia and Citigroup, almost always a target has the right to look for better deals."

"I'm not sure Citigroup has a significant leg to stand on. Citigroup may be facing the chance to get themselves a small settlement, and that's a nice shot in the arm for a company that's struggling," she said.

Hit by the credit crunch that has made borrowing in bond markets increasingly expensive, US banks are looking actively to boost their branch networks, which allow them to raise money from depositors.

Last week, JPMorgan Chase & Co. said it would acquire fallen bank Washington Mutual (WaMu) for $1.9 billion, a move that would temporarily catapult JPMorgan past Bank of America Corp. to become the nation's second largest bank, with $2.04 trillion of assets, just behind Citigroup.

However, Bank of America will become the No.1 US bank when it completes the planned $50 billion purchase of Merrill Lynch.