Citi is right to walk away from Wachovia
The Wells Fargo deal is better for shareholders, employees and taxpayers. If Citigroup is desperate for deposits, it should go find another bank to buy.
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| Shares of regional banks National City, SunTrust and Regions Financial have plunged this year, which could make them appealing takeover candidates for Citigroup. |
NEW YORK (CNNMoney.com) -- Wells Fargo and Citigroup were apparently still battling over who should get the right to buy Wachovia on Thursday.
The government had been urging a quick resolution so that the two banks, which agreed yesterday to extend their standstill on pending legal actions until tomorrow, don't have to drag this case though the courts.
That no longer seems like an option. Late Thursday, Citigroup said it was ending negotiations with Wells Fargo and seeking damages from Wells and Wachovia.
According to several published reports, Wells and Citi were taking about a deal where Wells would acquire the majority of Wachovia (WB, Fortune 500) with Citi getting about 20% or so. But talks clearly hit a snag.
Call me crazy. But isn't it about time Citi came to this inevitable conclusion?
Citigroup is right to walk away -- even if it has to be paid to do so -- and go find something else to buy.
Wells Fargo (WFC, Fortune 500) wants to buy all of Wachovia for about $15.7 billion, or $7 a share. Citigroup (C, Fortune 500) announced four days before Wells swooped in with its bid that it planned to buy just the banking assets of Wachovia for about $2.2 billion, or $1 a share.
Do the math. $7 or $1? Which is the better deal for Wachovia shareholders? Hmm.
In addition, the Wells deal is arguably better for Wachovia employees.
There's less geographic overlap between Wells, which is based in San Francisco and mainly has a branch presence on the West Coast and Midwest, and Wachovia, which is based in Charlotte and is big on the East Coast.
Wachovia does have a branch network in California as well through its disastrous 2006 purchase of savings and loan Golden West. But Citi, headquartered in New York, has more overlap with Wachovia as both have a sizable presence in many markets in the Northeast and Mid-Atlantic.
What's more, the Citi purchase would leave the company's Wachovia Securities brokerage division (Wachovia bought A.G. Edwards last year) and Evergreen Investments mutual fund business in limbo.
"To me, the offer that came from Wells Fargo is quite superior," said Theodore Kovaleff, an analyst with Granta Capital in New York.
But most importantly, the Wells deal puts no taxpayer money at risk. None. Wells agreed to take on all the potential losses from Wachovia's troubled loan portfolio.
Citi, on the other hand, had the FDIC broker its deal. Citigroup would absorb up to $42 billion in potential losses. The FDIC would be on the hook for the remainder of losses in a $312 billion pool of Wachovia's loans. The FDIC would get $12 billion in Citi preferred stock and warrants as collateral.
So let's do the math again. Wells puts zero taxpayer dollars at risk. Citi's deal potentially leaves the FDIC holding the bag on $280 billion in losses. What's the better deal? Hmmm.
As one of this column's loyal readers, Jay Black, put it in an email to me, "This whole thing with Citi and Wells fighting over Wachovia is ridiculous. Citi will cost the [government] money and Wells will not. That's a no-brainer to me."
The FDIC has done an admirable job of managing the banking crisis so far, which makes it a little disconcerting that it has not decided to fully endorse the Wells Fargo offer over Citigroup's.
Instead, the FDIC said last week that it is standing by the Citi deal but is also "reviewing all proposals...to pursue a resolution that serves the public interest."
But when would cutting a bank into pieces and potentially putting taxpayer money at risk be in the public interest?
I realize that Citi has a legitimate legal beef here. According to a copy of the merger exclusivity agreement with Wachovia obtained by CNNMoney.com, it is clearly spelled out that Wachovia was not permitted to engage in other discussions regarding a sale of the bank.
What's more, Citigroup and Wachovia agreed that in the event of a breach of the deal, the banks would be "irreparably harmed" and "could not be made whole by monetary damages." In other words, Citigroup did not see a need to negotiate a possible break-up fee if Wachovia found another white knight.
But clearly that stance has changed. On Monday, Citigroup filed a suit against Wells and Wachovia asking for $60 billion in damages and late Thursday, Citigroup said it is still seeking damages. So Wells should now probably agree to pay Citigroup something for walking away. Citi apparently will not refuse a break-up fee.
If Citi is to be believed, the purchase of Wachovia's banking assets is not a make or break acquisition for the firm. In the press release about its complaint Monday, Citigroup said that Wachovia "was always a deal Citi wanted rather than one we needed."
So if that's the case, then instead of trying to broker a split of Wachovia, why wasn't the government strongly suggesting to Wells all along that it pay Citigroup a reasonable break-up fee that Citi could then use to target another bank?
There are plenty of other large banks that Citigroup could go after if it's craving more deposits as a source of capital.
"Citigroup can afford to be opportunistic. There are other banks that may well find themselves available," Kovaleff said.
Cleveland-based National City (NCC, Fortune 500), the 10th largest bank in the country according to data from the Federal Reserve, has been hit hard by the credit crunch. And shares are actually up nearly 8% today on speculation that it's looking for a buyer.
And if Citi is more interested in building up its network in the Southeast, two big banks whose stocks have also plunged this year could be a good fit: Atlanta-based SunTrust (STI, Fortune 500), which is the 8th largest bank in the country, and Birmingham, Ala.-based Regions Financial (RF, Fortune 500), the 11th biggest bank in the U.S.
Citi has more options. If Wells Fargo now is willing to pay nearly $16 billion for all of Wachovia and not ask the FDIC for any help, then what's the problem? It's time for Citi to now go back to the drawing board and start shopping for something else. 
