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Wells Fargo agrees to buy Wachovia; Citi objects

(Agencies)
Updated: 2008-10-04 14:59

The potentially bigger tax offsets could boost the income of banks that buy other banks with losses from mortgage assets.

"We suspect that the new IRS guidance allowed Wells Fargo to place a higher bid for Wachovia today than it might have been willing to a few days ago," said Jeff Harte, an analyst at Sandler O'Neill & Partners, in a note issued Friday.

Essentially, Wells Fargo could use the $74 billion of tax losses on Wachovia's loan writedowns to offset its own income, which means the bank's taxes could be much lower for several years, said Deutsche Bank analyst Mike Mayo.

In connection with the agreement, Wachovia is issuing Wells Fargo preferred stock representing 39.9 percent of Wachovia's voting power. This increases the probability that the transaction gets consummated quickly and that Wells Fargo will receive a positive shareholder vote, Wells Fargo said.

Wells Fargo plans to issue up to $20 billion of stock, primarily common stock, to maintain a strong capital position.

Charlotte will be the headquarters for the combined company's East Coast retail and commercial and corporate banking business. St. Louis will remain the headquarters of Wachovia Securities.

The combined company will have total deposits of $713 billion and more than 6,500 locations -- more than any other bank in the US.

While there is some overlap in states like California and Texas, the deal essentially opens up the entire East Coast to Wells Fargo, giving it a footprint in new markets such as New York and Miami.

In terms of total assets, a combined Wells Fargo-Wachovia would have $1.37 trillion in estimated pro forma assets as of the end of this year. As of June 30, Bank of America Corp. had $2.72 trillion in assets including those of Merrill Lynch & Co., which it is acquiring. Citigroup had $2.10 trillion and J.P. Morgan Chase & Co. had about $1.78 trillion, including WaMu's assets.

"This is the transaction that we thought should have been done and makes sense," Mayo said. "The biggest loser, in our view, is Citi, and we suspect that there is no breakup fee since their agreement with Wachovia was not finalized."

Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion in that period after writing down its assets by about $46 billion. That's the most write-downs of any US bank.

While Wells Fargo has logged three straight quarters of profit declines, the bank has been weathering one of the nation's worst credit crises much better than most of its competitors, in part because it had less exposure to the subprime mortgages whose failure undermined the financial sector.

Wachovia shares rose $2.30, or 58.8 percent, to close Friday at $6.21. Wells shares slipped 60 cents to $34.56, and Citigroup shares dropped $4.15, or 18.4 percent, to $18.35.

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