By David Mildenberg and Patricia Hurtado
Oct. 6 (Bloomberg) -- Citigroup Inc. and Wells Fargo & Co. may end up dividing Wachovia Corp., the Charlotte, North Carolina-based bank staggered by almost $53 billion of mortgage- related losses.
Wells Fargo's $15.1 billion offer on Oct. 3 trumped New York-based Citigroup's $2.16 billion bid for parts of Wachovia, setting up a takeover fight for a bank with 20 million customers and almost $450 billion of deposits.
``Citi's purchase was too cheap for the assets and operations involved,'' said Jason Pride, research director at Haverford Trust Co. in Haverford, Pennsylvania, which held about 70,000 Wachovia shares at the end of June.
To end a legal skirmish, Citigroup may agree to take Wachovia's branches in the northeast and mid-Atlantic regions, while Wells Fargo would get the Southeast and California branches, as well as Wachovia's asset-management and brokerage units, the Wall Street Journal reported, citing people familiar with the situation. Officials from the banks declined to comment.
Vikram Pandit, Citigroup's chief executive officer, has been counting on the purchase of Wachovia's banking operations to help rebuild after three quarters of losses totaling more than $17 billion. San Francisco-based Wells Fargo said last week that acquiring Wachovia would give it a banking presence in 39 states, up from 24, and make it the No. 1 consumer bank in 10 of the country's 20 biggest metropolitan areas.
Citigroup tried to block Wells Fargo's agreement in court over the weekend, prompting officials from the Federal Reserve and U.S. Treasury to intervene.
Legal Wrangling
Citigroup dropped 18 percent to $18.35 on Oct. 3 in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21 and Wells Fargo declined 1.7 percent to $34.56.
Wachovia has said Wells Fargo's bid is better for shareholders, employees and taxpayers because, unlike Citigroup, it doesn't rely on government aid.
Under the split being discussed now, neither Citigroup, the biggest U.S. bank by assets, nor Wells Fargo would get U.S. financial assistance, the Journal said.
The two suitors spent the weekend wrangling in state and federal court, with Citigroup winning a New York state ruling on Oct. 4 that said it had the exclusive right to negotiate a takeover with Wachovia until Oct. 10. That ruling was overturned on appeal yesterday, leaving today's expiration date in place.
Role of FDIC
The takeover battle began Sept. 29 when Citigroup made its bid with backing from the Federal Deposit Insurance Corp. to rescue Wachovia from declaring bankruptcy, according to documents provided by Citigroup. Wells Fargo, which said it was unable to complete a competing bid in time to be considered, returned with its higher offer later in the week, which Wachovia accepted. Citigroup said this violated a signed agreement not to solicit new offers.
Wachovia said yesterday in a complaint filed in the U.S. district court in New York that FDIC Chairwoman Sheila Bair, who initially agreed to provide financial support to the Citigroup bid, later helped broker the deal with Wells Fargo.
On Oct. 2 at about 7 p.m. local time, Bair called Wachovia CEO Robert Steel, 57, and told him to expect a call from Wells Fargo Chairman Richard Kovacevich, 64, regarding the bank's offer of $7 a share, according to the complaint. Bair encouraged Steel ``to give serious consideration to that offer,'' according to the Wachovia court filing.
``Officials from both the Treasury Department and the Federal Reserve also contacted Wachovia's lead outside counsel to inform him that the offer from Wells Fargo was forthcoming and that Wachovia should give it serious attention,'' according to the complaint.
Andrew Gray, a spokesman for the FDIC, didn't return a message left on his mobile phone seeking comment.
Steel's Position
Steel said in an affidavit that he agreed to the Wells Fargo deal partly because the FDIC was threatening to put its banking operations into receivership if a ``definitive merger agreement'' with either Citigroup or Wells Fargo wasn't signed by Oct. 3.
Wachovia's discussions with Citigroup had ``proved extremely complicated and difficult,'' whereas Wells Fargo's offer was ``simpler, easier for shareholders to understand, more likely to close and more likely to receive shareholder approval,'' Steel said.
After Wachovia's board approved Kovacevich's offer, Bair and Steel phoned Citigroup's Pandit, 51, to say that Wachovia had agreed to the Wells Fargo deal, Steel said. When Citigroup opted to fight Wells Fargo, Wachovia took the case to federal court.
Wachovia Shareholders
Steel stands to benefit from any improvement in bids for Wachovia. Recruited from the Treasury department in July to rebuild the lender's credibility with investors, he bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.
Wells Fargo's bid has won endorsements from stakeholders, including Davis Selected Advisers LP, the Dodge & Cox mutual fund group and the Sandler family, according to a statement. The Sandlers sold Golden West Financial Corp. to Wachovia in 2006 for about $24 billion, when Wachovia was run by CEO Kennedy Thompson. The unit's option-ARM home loans have since been blamed for contributing to Wachovia's record quarterly losses and Thompson lost his job.
To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net; Patricia Hurtado in Brooklyn, New York, at pathurtado@bloomberg.net
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