Wells Fargo to buy Wachovia - snub Citigroup

A battle for Wachovia Corp. erupted as Wells Fargo & Co. struck a $15.4 billion deal to buy the Charlotte, N.C., bank only four days after it agreed to a takeover by Citigroup Inc. at a much lower price.

Wachovia insisted there is nothing to stop it from scrapping the federally backed purchase by Citigroup. But the New York bank threatened to challenge the Wells Fargo deal on the grounds that it is in "clear breach" of an "exclusivity agreement" signed earlier this week, according to a statement issued by Citigroup minutes after the end of a Wells Fargo conference call with analysts and investors.

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Citigroup also is considering increasing its bid for Wachovia, valued at about $2.16 billion.

According to a copy of the Sept. 29 agreement between Citigroup and Wachovia that was reviewed by The Wall Street Journal, Wachovia agreed not to "enter into or participate in any discussions or negotiations with … any third party that is seeking to make, or has made, an Acquisition Proposal." (See the document.)

Wachovia officials don't dispute the contents of the agreement signed with Citigroup. But a person familiar with the situation said that Wachovia directors were obliged under their fiduciary duty to shareholders to accept Wells Fargo's higher offer, even though that leaves Wachovia legally vulnerable.

The recriminations and abrupt upending of the deal struck by Citigroup and Wachovia before dawn Monday set up the likelihood of an extraordinary fight between the third- and fourth-largest U.S. banks in stock-market value to snag Wachovia. It has fallen to eighth-largest among U.S. banks because of its battered stock price and the conversion of Goldman Sachs Group Inc. and Morgan Stanley to bank-holding companies last month.

The situation also reflects the colliding interests of banks, their stock and debt holders, regulators and acquirers amid the chaotic environment swirling through the U.S. banking industry.

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Richard Kovacevich, chairman of Wells Fargo

The Wells Fargo offer is for $7 a share in stock, based on Thursday's closing price, 79% above where Wachovia shares finished. Wells Fargo also will assume Wachovia's preferred stock and debt.

In conjunction with the deal, Wells Fargo will issue $20 billion in new securities, mainly common stock. Wachovia shares surged 64% premarket to $6.40 while Wells Fargo rose 1% to $35.50 and Citigroup fell 6% to $21.15.

Citigroup executives, blindsided by the Wells Fargo agreement to buy Wachovia, are considering filing a lawsuit against the two banks and also may sweeten their bid for Wachovia, according to a person familiar with the matter.

Citigroup, which hoped to gain access to Wachovia's deep well of deposits, is considering its legal options, including suing Wachovia for breach of the exclusivity pact and suing Wells Fargo for tortious interference, the person said.

In a statement, Citigroup "demanded that Wachovia and Wells Fargo terminate and not proceed with any proposed transaction, any conduct in furtherance thereof, or any other act in violation of the Exclusivity Agreement. Citi has substantial legal rights regarding Wachovia and this transaction."

Citigroup executives also believe that federal banking regulators may intervene on their behalf to block the Wachovia-Wells merger, this person said. A spokesman couldn't be immediately reached for comment.

Officials from Wells and Wachovia dismissed the Citigroup concerns when answering questions on this topic during a conference call.

'Deal Is Solid'

"We think that this deal is solid," said Wells Fargo Chairman Richard Kovacevich. "We are not aware of any merger agreement that has been consummated at the time and as far as other issues, I haven't seen anything in terms of issues that Citigroup had or doesn't have. We feel very confident that this transaction has been done appropriately and will continue and be consummated."

He added: "We believe that regulators would also be comfortable with what has transpired here."

Wachovia Chief Executive Officer Robert Steel, referring to two questions pertaining to Citigroup, noted "there is controversy on this issue and that will be addressed in the appropriate way."

An analyst followed that response by asking Mr. Steel directly if he could address whether Wachovia had a binding agreement with Citigroup.

Mr. Steel said, "No."

A resolution against Citigroup would be a bad development for the company. It would highlight weak spots at the New York banking giant and challenge the notion that it has moved solidly from the problem category to the solution camp as the financial crisis unfolds.

Citigroup's move to buy Wachovia's banking operations was widely seen as an effort to shore up its deposit base, which will now look less solid. Also, Wells Fargo is buying all of Wachovia without government help. That makes Citigroup's deal for only part of the company and need for Federal Deposit Insurance Corp. guarantees against losses on some problem loans look relatively paltry. In a statement, FDIC director Sheila Bair said the agency stands behind "its previously announced agreement with Citigroup."

Ratings agencies warned after the Citigroup deal that they could downgrade the financial services company's debt. They expressed concerns about the poor quality of some of Citigroup's own assets.

A Citigroup spokeswoman wasn't immediately available to comment.

Under the deal, Wells Fargo will acquire all of Wachovia. The Citigroup deal had excluded the asset-management and brokerage operations and put the Federal Deposit Insurance Corp. on the hook for potential loan losses.

Mr. Kovacevich said that the deal "provides superior value" to the Citigroup deal and that it will allow Wachovia shareholders to "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."

The deal represents a major reversal from Wells Fargo's historical trend against acquisitions. Just two months ago, Chief Executive John Stumpf said it was highly unlikely Wells Fargo would pursue a large East Coast rival.

But Wells Fargo's appetite for acquisitions began changing in September, as Mr. Kovacevich said the bank "often buys fixer-uppers," adding, "Given the financial conditions today I feel like a kid in a candy store." Wells Fargo had also taken a look at Washington Mutual Inc. before it was seized last week and sold to J.P. Morgan Chase & Co. for $1.9 billion.

Wachovia shareholders will get 0.1991 share of Wells Fargo stock for each Wachovia share. Following the deal, Wells Fargo expects to incur about $10 billion in merger and integration charges. To maintain its capital position, it plans to issue up to $20 billion of new Wells Fargo securities, primarily common stock.

As part of the deal, Wachovia is issuing Wells Fargo preferred stock that votes with Wachovia's common stock and gives Wells votes equal to 39.9% of Wachovia's voting power.

"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," Mr. Steel said in a prepared statement. He added that the deal "enables us to keep Wachovia intact and preserve the value of an integrated company, without government support."

Mr. Kovacevich said the deal "will result in an immensely strong, stable financial services company." He noted the inclusion of Wachovia's brokerage and asset-management businesses "avoids the complexity and unavoidable loss of value in trying to separate them, which would have disrupted Wachovia's team members and customers." He added, "And, of course, this agreement won't require even a penny from the FDIC."

Charlotte will be the headquarters for the combined company's East Coast retail and commercial and corporate banking business, while St. Louis will remain the headquarters of Wachovia Securities. Three members of the Wachovia board will be invited to join the Wells Fargo board following completion of the deal. Mr. Stumpf indicated the company will try to "retain as many of the talented Wachovia team members as possible."

Citigroup's deal with Wachovia had been hammered out in frenetic negotiations that lasted all of last weekend. The immediate catalyst was that major credit agencies were poised to cut Wachovia's ratings, just as the bank had billions of dollars in debt coming due this week.

Wells Fargo initially said it was prepared to buy Wachovia for more than $20 billion and wouldn't require any government assistance. But late Sunday, the San Francisco bank abruptly changed its mind, setting into motion a desperate scramble through the night that ended with the government presiding over Wachovia's shotgun marriage to Citigroup early Monday morning.

Wells Fargo's deal announced Friday indicates that it changed its mind again and that Wachovia was quick to break its agreement with Citigroup.

Wachovia said it received and approved the proposal from Wells Fargo Thursday night.

Acquiring Wachovia would have vaulted Citigroup into the upper echelon of U.S. banks. The addition of Wachovia also would have allowed Citigroup to boast the third-largest network of U.S. bank branches. Today, Citigroup has about 1,000 U.S. bank branches -- lagging behind nine other banks.

Wachovia's woes came into sharp focus after last week's seizure of Washington Mutual Inc. Shares of Wachovia slumped as investors looked at it as the potential next victim in the credit crunch.

Wachovia wasn't doomed by the same sort of customer exodus that led regulators to seize WaMu's banking operations last week. But federal officials concluded that the bank's deteriorating condition posed a threat to the already fragile U.S. financial system.

Wachovia has tens of billions of dollars in so-called option-ARMs outstanding. The adjustable-rate mortgages allow some homeowners to actually increase their loans' balance by paying less than the full monthly interest they owe. They have been at the heart of surging foreclosures and defaults.

—Marshall Eckblad, Donna Kardos and Tony Cooke contributed to this article.

Write to Matthias Rieker at matthias.rieker@dowjones.com and David Enrich at david.enrich@wsj.com