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Wachovia shareholders eye future with caution
Analysts give deal high marks; FTC approval moves it forward
Journal Graphic by Nicholas Weir
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Published: October 11, 2008
Wells Fargo & Co. may be on a smooth regulatory path -- so far -- toward buying Wachovia Corp.
But analysts said yesterday that it still faces significant obstacles in integrating Wachovia into its network.
Some Wachovia shareholders said that although they are grateful for Wells Fargo's trumping of Citigroup Inc.'s offer, they're going to take a wait-and-see approach toward any long-term relationship.
"I will have to give some thought to the future of Wells Fargo after the deal is done," said Alan Hardman, a Wachovia shareholder from the Northeast.
"Should I dump the stock, or wait it out and roll with the next two or three years with hope to recover some of my losses, which are estimated around $300,000 to $350,000."
But Jon Mack, a Wachovia shareholder from Lewisville, said that Wells Fargo's decision to buy Wachovia "is a glimmer of hope for all local stakeholders, given the latest turbulence in the market."
Wells Fargo officials wouldn't comment on when a vote by Wachovia shareholders would be held and when it would begin integrating the two banks. The banks expect the deal to close by year's end.
Fitch Ratings said in a report yesterday that "while every merger has integration risks, Wells Fargo's track record with large acquisitions has been excellent, which bodes well for its whole-company transaction of Wachovia."
The Federal Trade Commission provided the bank yesterday with an "early termination" of its antitrust reviews, which means that the commission took less than 30 days to complete its review. The bank is pursuing expedited approval of the deal from the Federal Reserve.
Quick regulatory approval is expected considering that Wells Fargo said that its deal for Wachovia requires no federal-government assistance; Citigroup's bid required significant federal help.
Citigroup provided more evidence yesterday of how dire Wachovia's financial status was the weekend before Citigroup made its offer to buy it.
According to The Charlotte Observer, Citigroup said in a court filing that Wachovia had lost $5 billion in deposits on Sept. 26 in a "silent run." That plunge in deposits was a key factor in regulators prodding Wachovia into hastily pursuing a buyer.
The FTC approval came a day after Citigroup bowed out of the competition for Wachovia but vowed to vigorously fight for damages in court for what it considers a breach of its exclusivity agreement with Wachovia. It is asking for $60 billion in damages from Wachovia, Wells Fargo and their boards of directors for interfering with its offer.
Citigroup's decision to concede on Wachovia led to at least one lawsuit being withdrawn yesterday.
Two shareholders, including Bud Baker, the former chairman and chief executive of Wachovia, had filed a lawsuit against Citigroup in Mecklenburg Superior Court on Sunday. The aim of the lawsuit was to prevent Citigroup from enforcing any of the provisions regarding the exclusivity limitations in the letter agreement between Citigroup and Wachovia.
The value of Wells Fargo's deal rose slightly yesterday because of stock-price fluctuations, although it is still less than what was offered at first.
Wells Fargo's stock offer was valued initially at $15.1 billion, or $7 a share, based on a share price of $35.16 on Oct. 2. It is now worth about $12 billion, or about $6 a share, based on yesterday's closing share price of $28.31, up $1.06.
By comparison, Citigroup's offer was $2.2 billion and $95 billion in assumed debt and loan losses.
Michael Mayo, an analyst with Deutsche Bank, wrote in a note to investors that "in our view, this merger should be the best of the bunch since it combines a bank with a bank and gives a strong national footprint" to Wells Fargo.
The proposed combined bank will have $1.4 trillion in assets, $787 billion in deposits, 48 million customers and 10,761 branches. It would have the top market share in 17 of the 39 states in which it has branches.
"The main issues -- and it is a big issue -- is how much the weaker U.S. housing, mortgage and consumer markets will take a toll on the pro forma bank that is the largest, or about the largest, in each of these areas when it comes to financial services," Mayo wrote.
"Wells Fargo still has not confirmed the amount of charges on Wachovia's loans at closing and the degree of tax benefits that this will provide." The Internal Revenue Service recently changed a tax law that allows companies to offset losses from companies they are buying with tax breaks.
Wells Fargo has said it expects to take a $74 billion hit on Wachovia's $498 billion loan portfolio.
"A newer issue is the lower stock price of Wells, which could cause slightly more dilution when it raises its planned $20 billion of new common stock," Mayo said.
Wachovia said that the audit committee of its board of directors has approved issuing about 40 percent of preferred shares to Wells Fargo without getting shareholder approval. The arrangement, which was part of Wachovia's enticement to Wells Fargo, is backed by the New York Stock Exchange.
The committee said that taking the time to secure shareholder approval "would seriously jeopardize the financial viability of Wachovia."
Dick Kovacevich, the chairman of Wells Fargo, said he believes that the bank understands the credit issues involving Wachovia.
"Given our broad-based operating expertise, and specific understanding of these individual businesses, we believe we have adequately evaluated the risks inherent in the portfolios as of the time of this merger agreement," Kovacevich said.
Wachovia shareholders said they are relieved that they no longer have to consider a Citigroup offer.
"Citi would not have gotten past the shareholders with their offer, it was so poor," said Jim Moncure, a Wachovia shareholder in Charlotte. "Its deal was nothing more then a matter of timing and circumstance.
"As a shareholder who is still underwater at $7 at share, I'm grateful for Wells making a better offer. Better for the people of Charlotte, better for the taxpayer and better for the shareholders."
Bart Narter, an analyst with Celent, said that Wells Fargo could benefit initially from the goodwill of trumping the offer of Citigroup.
"Banks always experience some customer attrition in an acquisition," Narter said. "Generally, it is a large bank acquiring a small bank, and customers prefer a small-bank infrastructure.
"That isn't the case here. There will be customer attrition, but it isn't as if Wachovia customers are used to the bank president inside the local branch."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
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