Citigroup demands that Wachovia, Wells Fargo call off deal

A legal fight is brewing over the surprise $15 billion merger announced Friday morning between Wachovia Corp. and Wells Fargo & Co. that upsets a Citigroup Inc.-Wachovia transaction announced on Monday.

In an interview, Wells Fargo chief executive John Stumpf said Charlotte-based Wachovia and San Francisco-based Wells have a merger agreement and that "we're very confident that this will lead to a combination." Wells said it expects the deal to be completed by year end.

Citigroup, however, issued a statement demanding that Wachovia and Wells Fargo terminate the transaction. Citi said the deal was a clear breach of an exclusivity agreement between Citi and Wachovia and that it "has substantial legal rights regarding Wachovia and this transaction."

On Monday, New York-based Citi announced that it was buying most of Wachovia's banking operations and assets for $2.16 billion in stock, with assistance from the Federal Deposit Insurance Corp. That deal would have left behind a standalone company housing brokerage and asset management businesses, but its future has been uncertain. It also would not have made a direct payment to shareholders, although they would have still owned the remainder of Wachovia.

As of Thursday evening, no merger agreement between Citi and Wachovia had been finalized but Wachovia said it was working quickly to complete one. In a conference call this morning, Wachovia chief executive Bob Steel declined to comment on whether Wachovia had a merger agreement with Citi.

The new deal — the equivalent of $7 a share — doesn't include FDIC assistance.

San Francisco-based Wells said that Charlotte would be the headquarters for the combined company's East Coast retail and corporate banking business. St. Louis would continue to be the base for Wachovia Securities. Three members of the Wachovia board would be invited to join the Wells board when the transaction is completed. Wells said the name of the combined company would be Wells Fargo.

In a conference call this morning, Wells Fargo said it expects to cut expenses of the combined company by 10 percent, or $5 billion, by the end of 2010. The bank said it will identify these cost savings as the two companies are combined.

Stumpf, in the interview, said it was too early to say what the impact on Charlotte will be. He said executives will get to know each other and decide which businesses to grow or not grow. He noted that when Minnesota-based Norwest merged with Wells in 1998 Norwest had about 14,000 employees in Minneapolis and now it has 20,000. But he added: "That doesn’t mean there won’t be changes."

The Wachovia-Wells deal wouldn't require a complicated separation of the companies, like that announced in the Citi plan, and there would be less overlap in geographic territory, brokerage and corporate and investment banking.

The combined company will have more branches than Bank of America — 6,675 vs. 6,138 — but would have a smaller deposit base than Bank of America, counting its acquisition of Countrywide Financial and planned purchase of Merrill Lynch — $713 billion vs. Bank of America’s $819 billion.

This morning, Citi, however, pushed the benefits of its deal for Charlotte. Citi will move the combined retail bank to Charlotte and move additional businesses here, a senior executive at the New York bank told the Observer this morning.

Citi had previously committed only to maintaining "a strong presence" in Charlotte, raising speculation that it would move the retail bank operations elsewhere. "Our plan is to take advantage of the wonderful people in Charlotte," the executive said. He said there would be no job cuts in any retail branches across the country. He declined to specify which operations might move here. He also said that the decisions regarding Charlotte were not influenced by Wells Fargo's announcement this morning.

"It’s not just the cost of living, it’\'s the quality of the people," he said. "I believe your mayor when he said it's Bankcity, U.S.A. In fact, I ran into a friend of mine’s son while I was down there, and he’s there because it provides an environment to have a job in financial services and also raise a family."

He made it clear that Citi will fight the Wells Fargo agreement. "That's impossible for them to do," he said, referring to a deal between Wells and Wachovia. "We have an exclusivity agreement with Wachovia that's legally binding."

The agreement dated Monday and signed by Citi's chief financial officer, Gary Crittenden, and Wachovia's general counsel, Jane Sherburne, forbids Wachovia from talking to other parties about a potential deal prior to Oct. 6.

Citi says it had "nearly completed" the definitive agreements that would've finalized its acquisition. It added that it had been providing "liquidity support" to Wachovia since the acquisition was announced Monday.

Citi's deal requires government assistance. Citi will take the first $42 billion in losses on $312 billion in Wachovia loans, but the FDIC would absorb the rest.

"Since the close of our bidding process, Wells has apparently re-assessed its position and come forth with this new offer that does not require FDIC assistance," FDIC chairman Sheila Bair said in a statement. "It should be emphasized that both the Citigroup proposal as well as the new Wells proposal would stand behind all creditors including depositors, insured and uninsured. Under either proposal, all banking customers of the merged institutions would be fully covered with no disruptions in service.

The FDIC will be reviewing "all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest," Bair said, adding: "The FDIC stands behind its previously announced agreement with Citigroup."

In a joint statement, the Federal Reserve and the Office of the Comptroller of the Currency said they had extensively reviewed the Citi transaction but had not yet reviewed the Wells deal. "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," the statement said.

In early trading, Wachovia shares jumped 69 percent to nearly $6.63, while Wells shares rose 6 percent to $37.27. Citi shares fell 9 percent to $20.50.

The deal capped a whipsaw week for employees. On Thursday, Wachovia general bank executives were trying to rally employees around the Citi deal. On Friday, they awoke to news they were merging with Wells. "I'm jubilant," one employee said. "On Monday, I was suicidal."

Under normal circumstances, Wachovia would be loath to be bought out by another bank, but it has struggled under a toxic mortgage portfolio since last summer and appeared headed toward insolvency this weekend. The deal with Wells Fargo comes a decade after another major transaction between a Charlotte bank and a San Francisco bank — though in that case, it was Charlotte's NationsBank taking over San Francisco's BankAmerica Corp.

"We at Wachovia have great admiration and respect for the people and businesses at Wells Fargo and we are extremely pleased to join forces with this outstanding company," said Steel, who was brought in as Wachovia's CEO in July, in an effort to turn around the struggling bank. "Today’s announcement 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. The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complementary and this combination creates great potential for sustained stability and growth."

The deal will require approval of regulators and Wachovia shareholders — many of whom had expressed anger over Citi's bargain-basement offer. Wells Fargo and Wachovia will have one of the biggest U.S. deposit bases and a coast-to-coast franchise. Wells Fargo says the combined company will be No. 1 in deposits in 17 states including California, traditionally a stronghold of Bank of America.

In combining the two companies, Wells said it will mark down Wachovia's loan book of $498 billion by $74 billion. It's marking down the value of Wachovia's $122 billion in Pick-A-Payment loans by $32 billion.

The deal will add to Wells' earnings in the first year of operations, excluding writedowns, charges and other costs, the company said. It expects to incur merger and integration charges of about $10 billion. It will issue up to $20 billion in securities, primarily stock, to preserve its capital levels.

Wells Fargo had passed on buying Wachovia Sunday, leading to a forced sale to Citigroup for $2.16 billion in stock. That deal would have left part of Wachovia behind and would not have provided a direct payment to shareholders.

Wachovia and Wells have long been seen as potential partners, pairing large East Coast and West Coast franchises. While Wachovia has been battered from loan losses from its 2006 Golden West acquisition, Wells has fared better, helped by higher loan underwriting standards. Over time, it has largely eschewed big deals for smaller purchases west of the Mississippi. While Wachovia lost $9.1 billion in the second quarter, Wells made a profit of $1.7 billion.

"This agreement represents a compelling value for Wachovia shareholders," said Wells Fargo Chairman Richard Kovacevich. "It provides superior value compared to the previous offer to acquire only the banking operations of the company and because 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.

Kovacevich noted this deal will not require the complicated unwinding of Wachovia's franchise, unlike the Citi deal. In that agreement, Citi would have bought Wachovia’s banking, wealth management and corporate and investment bank but left behind the brokerage and asset management businesses. In recent years, Wachovia has worked to increase cooperation and cross-selling between divisions, encouraging referrals between bankers and brokers, for example.

"We know this has been a time of great uncertainty for Wachovia team members and many of its customers as their company has gone through a very painful and challenging time of unprecedented change in our industry," Stumpf said. "We want to assure them we'll do everything we can to make the integration of our operations as smooth as possible. An important measure of success for this integration will be our ability to retain as many of the talented Wachovia team members as possible so they can continue to provide outstanding service and financial advice to their customers and continue their careers with Wells Fargo."

Stumpf said the complete integration could take as long as three years to avoid disrupting customers and employees. It's well known for taking about three years to meld together Norwest and Wells Fargo. In fact, Kovacevich said, former Wachovia CEO Bud Baker called him to get advise on how to merge together Wachovia and First Union in 2001.

The combined company will have $1.42 trillion in assets, $787 billion in deposits, 10,761 branches and 280,000 employees. The company would provide a coast-to-coast rival for Bank of America and J.P. Morgan Chase.

The deal includes a clause that could make it difficult to break up. Wachovia is issuing Wells preferred stock that will give it 39.9 percent of Wachovia's voting power.