Citigroup buys Wachovia bank assets for $2.2B

As part of all-stock deal, Citi will acquire deposits, loans from nation's fourth largest bank. Citi also to raise $10B in stock sale, cuts dividend.

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By David Ellis, staff writer

Following weeks of speculation about its fate, Wachovia said Monday it would sell its banking assets to rival Citigroup, marking yet another seismic shift in the U.S. banking industry.
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NEW YORK ( -- Citigroup will acquire the banking operations of Wachovia for $2.2 billion in an all-stock deal announced Monday, following much speculation over the weekend about the fate of the nation's fourth-largest bank.

To help finance the transaction, Citigroup said it would raise $10 billion through a sale of common stock and announced it would slash its quarterly dividend yet again, cutting it in half to 16 cents a share to preserve capital.

As part of the deal, Citigroup will acquire Wachovia's massive deposit network, giving it more than $600 billion in deposits in the U.S., about a 9.8% market share, and broadening its presence in such key regions as the Southeast and the West.

At the same time, Citi will assume about $53 billion in the Wachovia's debt and take hold of the same loan portfolio that ultimately sank Wachovia in the end.

Of the more than $300 billion in loans it absorbs, Citigroup said it would cover up to $42 billion of losses on those loans, while the Federal Deposit Insurance Corporation will be on the hook for anything beyond that.

In exchange, the FDIC will get preferred stocks and warrants worth about $12 billion.

Banking regulators stressed that consumers who bank with Wachovia would not experience any interruption in service and that their deposits remained protected.

"Today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits," said FDIC Chairman Sheila Bair.

The FDIC noted that Wachovia did not qualify as a failed bank, unlike Washington Mutual, which collapsed last Thursday, only to be subsequently purchased by JPMorgan Chase (JPM, Fortune 500).

Following a string of high-profile collapses of banks in recent weeks including WaMu and the demise of Lehman Brothers, there has been increasing speculation that Wachovia could be the next one to go.

Some top federal officials, including Bair and Treasury Secretary Henry Paulson, had feared that had a deal for Wachovia not been reached, it could have resulted in further fallout for both the economy and the already fragile financial system.

"A failure of Wachovia would have posed a systemic risk," Paulson said in a statement.

Shares of Wachovia (WB, Fortune 500) were halted Monday morning. When trading resumed, shares fell more than 80% to below $2 a share, down from about $10 on Friday.

Citigroup (C, Fortune 500) shares fell about 6% following a rise earlier in the day. Citigroup, along with the broader market, fell as the House's vote on a controversial bank bailout bill failed to muster enough support.

A 'compelling' deal

After deploying more than 200 individuals to pore over Wachovia's books over the weekend, Citigroup CEO Vikram Pandit said that the purchase of Wachovia made the most sense given, among other things, its geographic exposure.

"We had looked at a number of deals and passed on these because they were not compelling," Pandit told investors during a conference call with investors Monday morning. "This one is compelling."

Analysts seemed to agree.

"This as a strategic positive," wrote analyst Jeff Harte, who covers Citigroup and other financial services firms for Sandler O'Neill & Partners.

There had been rampant speculation over the last three days that the Charlotte, N.C.-based Wachovia would be sold to either Citigroup or Wells Fargo (WFC, Fortune 500). Even Spain's Banco Santander (STD) had been mentioned as a possible bidder. By Sunday evening, a bidding war between the two banking giants was underway, The New York Times reported.

Even Morgan Stanley (MS, Fortune 500), which recently converted itself into a commercial bank from a stand-alone investment bank, was said to be discussing a possible tie-up with the Charlotte, N.C.-based bank.

Like many of its peers, Wachovia bet big on the U.S. mortgage market, which prompted it to suffer painful losses over the past two quarters.

Some analysts have blamed the company's ill-timed 2006 acquisition of the California mortgage lender Golden West Financial Corp. for the recent company's woes.

Wachovia will still remain a publicly traded company following Monday's deal -- albeit in much smaller form.

The Charlotte, N.C.-based firm will hold onto its massive brokerage business, which grew substantially following its $6.7 billion acquisition of A.G. Edwards last year. Wachovia also owns the Evergreen investment management division, which had more than $245 billion in assets as of June 30.

Risky move for Citi

While Citigroup's purchase keeps pace with moves by rivals JPMorgan Chase and Bank of America (BAC, Fortune 500), who acquired Merrill Lynch earlier this month, the deal for Wachovia comes as a bit of a surprise since Citigroup has been no picture of health lately.

Citigroup has posted close to $18 billion in losses over the past three quarters, while taking nearly $50 billion in writedowns on its diverse loan portfolio.

At the same time, Citi leadership has been working to shrink the company.

Citigroup's Pandit, who was installed as the company's chief executive last December, unveiled plans in May to unload more than $400 billion in assets over the next few years in the hopes of turning the company around.

Pandit stressed Monday that the Wachovia acquisition did not deter the company from its restructuring plans.

"Nothing is going to take our eye off the ball on getting fit," he said. "That plan continues in full force."

Just hours after the deal was unveiled, Congress voted down a proposed $700 billion bailout for the financial system hinting that another big shake-up of the nation's banking industry loomed.

In the past two weeks, the sector has undergone a dramatic transformation, including Lehman's bankruptcy, the acquisition of Merrill Lynch and the government takeover of insurer AIG (AIG, Fortune 500). To top of page

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