Citi Assumes Various Wachovia Assets
The bank, with an FDIC loss-protection agreement in hand, paid $2.16 billion to assume more than $700 billion worth of assets and liabilities.
September 29, 2008
In yet more consolidation in the banking industry, Wachovia agreed to sell the bulk of its assets to Citigroup, unloading its retail bank, its investment bank and its wealth management operations in the $2.16 billion deal. Wachovia Corp., which will continue to operate as a public company, will maintain control of its brokerage business, Wachovia Securities, and its asset management services arm, Evergreen Asset Management.
The transaction is just the latest in a series of deals that has transformed Wall Street and the broader banking sector. At the end of last week, Washington Mutual became the largest bank failure in American history after regulators shut down the $307 billion institution and coordinated a deal to sell its assets and deposits to JPMorgan for $1.9 billion.
"During recent weeks, the financial landscape has changed significantly and presented us with unprecedented challenges," Wachovia president and CEO Robert K. Steel said in a statement, adding that the sale to Citi represented “the best alternative for the company,” and enabled “a resolution” for its troubled Golden West portfolio.
As part of the deal, Citigroup will assume the senior and subordinated debt of Wachovia Corp., totaling roughly $53 billion. The transaction is expected to close before the end of the year, although it requires both regulatory approvals and clearance from shareholders.
According to analyst reports, Wells Fargo was also looking at the Wachovia assets, and initially had appeared to occupy the driver’s seat in negotiations. Citigroup, however, won the deal by taking on more than $700 billion of assets and related liabilities. The bank reached a loss-protection agreement with the Federal Deposit Insurance Corp. (FDIC) in connection with roughly $312 billion of mortgage related assets, of which Citi will be responsible for a maximum of $42 billion in potential losses. The FDIC, meanwhile, will be on the hook for any further losses, although Citi, as part of the agreement, will issue preferred stock and warrants together worth roughly $12 billion to the FDIC.
Vikram Pandit, Citi’s CEO, said in a statement that the transaction was attractive from a “strategic” perspective. “It will deliver the combined capabilities of two powerful organizations to our customers and shareholders, providing meaningful EPS accretion and downside loss protection. It will augment our access to stable funding and liquidity, and will accelerate our efforts to establish Citi as the world's leading global financial institution.”
He added that the deal will give Citi over $600 billion in domestic deposits, while total deposits will sit at roughly $1.3 trillion globally.
Analysts, meanwhile, believe the subsumption of the Wachovia assets represents the last deal among “major” institutions. Merrill Lynch analysts, in a research note preceding the transaction, wrote: “Wachovia appears to probably be the last of the major US financial institutions that needs to be resolved via a merger or government intervention.”
With that said, it’s likely that smaller institutions will become more proactive in solving their issues now that the government’s bailout plan provided some clarity to the sector. Analysts at Deutsche Bank, for instance, noted that one result of the Troubled Assets Relief Program could be that “mergers can be ‘jump started,’ especially with the ability to offload risky assets before or concurrent with a transaction.”
Goldman Sachs, Perella Weinberg Partners and Wachovia Securities served as advisers to Wachovia, while Sullivan & Cromwell and Simpson Thacher & Bartlett provided legal advice. Skadden Arps and Davis Polk represented Citigroup in the transaction.
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