Sunday, October 5, 2008

Whiskey Tango Foxtrot? Wells Trying to Crash the Wachigroup Party

This past Friday (10/3/08), Wells Fargo & Company (WFC) attempted to trump Citigroup's (C) bid for Wacovia (WB). C agreed (on 9/29/08) to buy the commercial banking, private banking, middle markets and investment banking operations in an all stock deal: roughly $2.16 billion or 121.7 million shares of C. In addition, C would assume $53 billion in Wachovia senior and subordinated debt. Wachovia would remain as a surviving entity, running its retail brokerage and asset management businesses.

As part of the deal, C agreed to issue $12 billion of preferred stock and common equity warrants to the FDIC as payment for loan loss protection on $312 billion of the Wachovia loan portfolio: C would be responsible for an initial writedown of $30 billion and additional losses of up to $12 billion over the subsequent three years (annual loss capped at $4 billion). Further losses were to be absorbed by the FDIC.

WFC's bid is for all of WB's operations. WFC would exchange 0.1991 share of WFC for each share of WB. This deal was initially valued (based on the WFC price at the time) at approximately $15 billion. This is a substantial premium over the C bid, additional assets notwithstanding. What made this bid possible was an Internal Revenue Service (IRS) decision on Tuesday of that week. The IRS increased the amount of losses an acquiring company can write off versus future earnings. This increased after tax benefit enabled WFC to pay a higher nominal price for WB.

Problems I have with this:

---- Citigroup claims that they bid for Wachovia at the behest of federal regulators. In addition, Citi states that they were granted an exclusivity agreement for the purpose of negotiating an acquisition of Wachovia. Timing is also an issue, Citi did not have that Tuesday announcement in hand when discussing terms that prior weekend. Talk about moral hazard, why would any company do the feds a favor again?

---- Even though the WFC deal does not involve the FDIC, it could turn out to be a worse deal for the U.S. taxpayer. An excellent Washington Post article (10/3/08) states that WFC may be able to shield $74 billion in earnings form taxation. Under the old law, the maximum would have been $20 billion.

Once again, Warren Buffet (major holder of WFC stock) is a possible beneficiary if the courts approve of the WFC bid. Could this be compensation for his support of GS & GE? Remember, MCO (credit rating agency) was placed on the no short list shortly after the GS announcement.

After reading several articles that cite legal experts, it seems as though Citi has a pretty good case and their deal is legally binding. The losers here may be the WB shareholders as their company twists in the wind and liquidity drys up my the minute. I guess it is possible that Citi increases their bid, but after this nonsense.........I doubt it.


Anonymous said...

It would be nice to see Citi come out on top for a change>

MK said...

Latest from DC: regulators are suggesting that C & WFC split up WB by geographic regions. They go to court on Friday if no compromise is attained.