UPDATE 5-Citigroup to acquire Wachovia banking operations
(Adds regional banks' shares falling, recasts lead, quote)
By Christopher Kaufman
NEW YORK, Sept 29 (Reuters) - Citigroup Inc (C.N) said on Monday it would buy the banking operations of Wachovia Corp WB.N in U.S.-brokered deal that U.S. Federal Reserve Chairman Ben Bernanke said would help bring financial stability.
Citi shares jumped 4.6 percent, but investors punished regional banking stocks.
The Citi-Wachovia deal, brokered by the Federal Deposit Insurance Corp (FDIC), came as authorities stepped in to rescue three European banks and U.S. lawmakers prepared to vote on a $700 billion U.S. financial bailout.
Bernanke said in a statement that the FDIC action "demonstrates our government's unwavering commitment to financial and economic stability."
Investors dumped shares of regional banks, wondering which regional bank might need a merger partner next. National City Corp NCC.N slid $1.72, or 46 percent, to $1.99 on the New York Stock Exchange. The big Ohio bank issued a statement saying it had no need or plan to raise additional capital.
The closely watched S&P Financial index .GSPF fell 4.5 percent, with Fifth Third Bancorp (FITB.O) -- another Ohio-based bank -- dropping 30 percent.
Under the Wachovia deal, struck in consultation with the Federal Reserve, the Treasury and President George W. Bush, Wachovia depositors will be fully protected, and no cost is expected for the Deposit Insurance Fund, the FDIC said.
"Wachovia did not fail; rather, it is to be acquired by Citigroup Inc on an open bank basis with assistance from the FDIC," the FDIC said on its website.
Shares of Wachovia tumbled more than 90 percent in premarket trading to below $1 per share, and the stock was halted during the regular session.
Citi shares rose 95 cents to $21.10 on the New York Stock Exchange.
RISK FOR CITI
Citi said in a statement it would pay about $2.16 billion in stock for Wachovia, including its roughly $53 billion of Wachovia debt. It will get more than $700 billion in banking assets, and related liabilities.
On a conference call, Citi Chief Executive Vikram Pandit said the bank would assume just over $100 billion of Wachovia debt in aggregate. He added that Citi has no strategic need to be in the asset management business.
To help pay the bill, Citi said it will raise $10 billion in common equity, and slash its quarterly dividend to 16 cents per share from 40 cents, effective immediately.
A banker familiar with the deal said it has risk "in a few places," such as how the assets perform and how quickly the new businesses are integrated.
William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts, said the deal for Wachovia, the sixth-biggest U.S. bank by assets, and the European bank rescues was taking the spotlight off the bailout plan and could spook world markets.
"These announcements couldn't have worse timing because they're taking the shine off the potential bailout (in Washington)," Larkin said.
NOT AG EDWARDS
Citi would get most of Wachovia's assets, including five depository institutions, but not Wachovia Securities, the brokerage that includes the big retail brokerage AG Edwards, which it bought a year ago, or its asset-management division, Evergreen.
"We will continue as a focused leader in retail brokerage and asset management," Wachovia spokeswoman Christy Phillips-Brown said. She declined to comment on other terms of the deal.
The FDIC is backing the deal with about $312 billion in loss protection on mortgage-related and other Wachovia assets, with Citi responsible for the first $30 billion in losses.
Citi is also responsible for the next $12 billion in losses up to a maximum of $4 billion per year for the next three years. The FDIC will receive $12 billion in preferred stock and warrants from Citi and has agreed to be responsible for any further losses on the Wachovia assets.
Citi would end up with about 4,300 branches in the United States and another 3,300 elsewhere, and said it expects to close less than 5 percent of the combined branches.
It sees the deal being accretive to its earnings from the first year, excluding $3.7 billion in pretax restructuring charges for severance over the next four years, and fully accretive in 2010.
Citi said it would have had a Tier 1 capital ratio of 8.8 percent in its second quarter that ended June 30, assuming completion of the transaction.
"One thing that Citigroup has been wanting to do for a while is to expand its retail operations because they are in very limited areas, so this would basically allow them to do that," said Rose Grant, managing director of Eastern Investment Advisors in Boston. (Reporting by Christopher Kaufman/Kristina Cooke/Juan Lagorio; Editing by John Wallace/Jeffrey Benkoe)
