Wells bids $16 bln for Wachovia; scuffles with Citi

By Dan Wilchins

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) agreed to buy Wachovia Corp WB.N for about $16 billion, catapulting it into the top ranks of U.S. consumer banking and upstaging a government-backed Citigroup Inc bid for the troubled bank.

Citigroup (C.N) demanded Wells Fargo (WFC.N) drop its surprise bid, which comes after Wachovia preliminarily agreed to sell its banking assets to Citi for $2.2 billion, with partial government guarantees on $312 billion of Wachovia's mortgages. Citi said Wachovia had agreed not to negotiate with other parties.

Regulators said on Friday they had not looked at the Wells Fargo bid, which would not require any government backing.

The lack of government support may make the Wells Fargo bid more attractive for regulators, analysts speculated, and some even argued that Citi ought to walk away.

"It's the right thing for the country for Citi to back off," Bill Hackney, managing partner at Atlantic Capital Management, which has $8 billion under management and owns Wells Fargo shares.

Wells shares closed down about 1.7 percent, after rising earlier in the day, while Wachovia shares closed up nearly 59 percent. Citigroup shares finished down about 18.4 percent.

But lawyers said Citigroup has a real case, including an exclusivity agreement and the fact that it has been providing support to Wachovia this week.

"Those are clearly strong facts on Citi's side," said Morton Pierce, chairman of the mergers and acquisition group at law firm Dewey & LeBoeuf. Dewey & LeBoeuf is not representing any of the parties in the transaction.

If Wells Fargo goes through with this deal, it will betaking a material risk. It will acquire $122 billion of "option pay" mortgages, where borrowers can choose every month whether to only pay interest on their mortgages, pay down some portion of their loan, and sometimes to pay less than the interest due.

In a plummeting housing market, such assets are seen as highly toxic, and Wells Fargo said it expects to write the assets down by $32 billion over time.

The bank estimates the total assets it is taking on will have to be written down by $74 billion in the years following the deal. Wells Fargo will issue up to $20 billion of securities, likely mostly common equity, to help offset those losses. These are big numbers for Wells Fargo, whose net worth as a company as measured by balance sheet shareholders' equity, was about $48 billion at the end of June.

KOVACEVICH

But many investors downplayed the risk to Wells Fargo, whose chairman, Dick Kovacevich, has a reputation for adeptly managing risk, and whose biggest shareholder is Warren Buffett's Berkshire Hathaway. (BRKa.N) (BRKb.N)

"I believe Kovacevich's and Buffett's history indicates they've done their due diligence on just how toxic this junk is," said Mike Holland, chairman of asset management firm, Holland & Co. Holland does not own shares of Citigroup, Wells Fargo, or Wachovia.

Wells Fargo may be able to secure some support through a $700 billion government program to buy bad assets that the House of Representatives approved on Friday afternoon.