By David Mildenberg and Josh Fineman
Oct. 4 (Bloomberg) — Citigroup Inc., hobbled by $61 billion of subprime-related losses, now faces its biggest takeover battle in a fight with Wells Fargo & Co. for control of Wachovia Corp.
Citigroup fell as much as 21 percent yesterday in New York trading after Wells Fargo, the biggest U.S. bank on the West Coast, agreed to acquire all of Charlotte, North Carolina-based Wachovia for $15.1 billion. The bid trumped Citigroup’s government-backed offer of $2.16 billion for Wachovia’s banking operations.
“The taxpayer doesn’t pay a penny” for the Wells Fargo deal, Wells Chairman Richard Kovacevich, 64, said yesterday in an interview. His company’s bid is superior to Citigroup’s also because it’s a higher price and the combining banks “share similar cultures and values.”
Vikram Pandit, Citigroup’s chief executive officer, is counting on the Wachovia purchase to help rebuild after three quarters of losses totaling more than $17 billion. The bank’s market value has dropped 38 percent this year to about $100 billion, leaving it below Wells Fargo. If Wells Fargo winds up with Wachovia, it would creep up on its New York rival with deposits of $787 billion, compared with Citigroup’s $826 billion.
Pandit insisted Citigroup will prevail, citing an exclusive agreement signed by Wachovia. Kovacevich told investors during a conference call the deal with Wachovia is “solid.”
Citigroup dropped 18 percent to $18.35 yesterday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.
Citigroup demanded Wells Fargo abandon the takeover. Buying Wachovia would give Citigroup the third-biggest U.S. bank network and cement its status as the nation’s largest lender by assets.
“Any such agreement between Wachovia and Wells Fargo is illegal,” Pandit, 51, said in the e-mail yesterday. “We continue to vigorously pursue Citigroup’s interest and rights in completing this transaction.”
Citigroup may take legal action to block the deal, or may increase its offer, said a person with knowledge of the deliberations.
“I’m still not convinced that Citigroup can force this sale to happen,” said Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell. “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.”
A court challenge and a bidding war aren’t the only possible roadblocks for Wells Fargo: Its offer may lead to a face-off with federal regulators.
The Federal Deposit Insurance Corp., helped broker Citigroup’s purchase when Wachovia’s health faltered. Chairman Sheila Bair said until a review of Wells Fargo’s offer is completed, the agency will stand behind the Citigroup deal.
“We wanted to make clear that until things are settled with what’s going on with this Wells bid, that the Citi deal was still there,” Bair said yesterday in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be broadcast over the weekend. Bair said the FDIC is reviewing the offer, and she told Hunt: “You shouldn’t” assume the U.S. opposes Wells’s offer.
Other bank regulators said they haven’t evaluated Wells Fargo’s offer.
“We have not yet reviewed the new Wells Fargo proposal and the issues that it raises,” the Federal Reserve and Office of the Comptroller of the Currency said today in a statement. “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.”
Wells Fargo’s Plan
Wells Fargo, run by Chief Executive Officer John Stumpf, had avoided bets on the subprime-mortgage market that contributed to $588 billion in writedowns and credit losses for financial firms worldwide. Wachovia in 2006 purchased Oakland, California-based Golden West Financial Corp. for $24 billion, acquiring a portfolio of option-adjustable rate mortgages that helped lead to $9.6 billion in losses this year.
Wells Fargo, in bidding for Wachovia, deviates from a strategy of seeking smaller acquisitions with less risk to fill gaps in its branch network. After the combination, the bank would have $1.42 trillion in assets, which may rank third in the U.S. depending on what other bank mergers are completed. It would have 10,761 branches in 39 states.
“Citi’s purchase was too cheap for the assets and operations involved,” said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania. “It’s an excellent strategic deal for Wells Fargo given the geography of the branch network.”
To contact the reporters on this story: David Mildenberg in Charlotte at firstname.lastname@example.org; Josh Fineman in New York at email@example.com.
Last Updated: October 4, 2008 00:00 EDT