Wachovia deal boon for Wells Fargo: analysts

By Anurag Kotoky

BANGALORE (Reuters) - Wells Fargo and Co's (WFC.N) acquisition of Wachovia Corp WB.N will be a major positive for the company as the deal will expand its presence in the "structurally attractive" Southeast region, at least three analysts said.

Stifel Nicolaus upgraded Wells Fargo to "hold" from "sell" while RBC Capital Markets and Fox-Pitt Kelton retained their "outperform" rating after Citigroup (C.N) abandoned its bid for Wachovia's banking assets, clearing the way for Wells Fargo.

"It (the Wachovia deal) provides Wells Fargo with the opportunity to become a national banking franchise at a much lower cost than cobbling several one-off transactions together," Stifel analyst Christopher Mutascio said in a note to clients.

The low cost of the acquisition and the tax benefits from it could allow the company to "manufacture earnings" that other banks can not do, in a more prolonged and broader-based economic downturn than originally anticipated, Mutascio said.

Citigroup (C.N) on Thursday walked away from its brief but acrimonious battle with Wells Fargo over Wachovia, losing out on a deal crucial to strengthening its retail banking business but vowing to pursue up to $60 billion in legal claims.

CONFUSION OVER

"This removes any confusion regarding how a potential breakup of Wachovia franchise to appease Citi and government might have worked in terms of logistics, legalities, and financials," Fox-Pitt analyst Andrew Marquardt said.

Marquardt said the deal is a "great" one for Wells Fargo as Wachovia has a strong legacy in retail, commercial and corporate banking, asset management and retail brokerage in the Southeast region.

Citigroup agreed last week to buy Wachovia's banking assets for about $2.2 billion, with partial government assistance, and it financially supported Wachovia while they hammered out final details.

But days later, Wells Fargo signed an agreement to buy all of Wachovia for about $15 billion at the time, including its asset management and retail brokerage arms. The recent slide in Wells Fargo shares puts the value closer to $12 billion, based on Thursday's closing price.

CONCERNS REMAIN

If Citi pursues the $60 billion legal battle against Wells Fargo and Wachovia for "breach of contract and tortious interference," the company could face some turmoil in the coming periods, RBC said.

"Due to a provision in section 126(c) of the recently-passed bailout bill, however, Wells may be free of liability, but if not it may still have an option to back out of the deal due to a material adverse change," RBC analyst Joe Morford said.

The company's proposed $20 billion equity offering may also be more dilutive now that bank stocks have sold off significantly since the deal was announced, Morford said.

He cut his price target on Wells Fargo stock by $6 to $32.

Stiefel's Mutascio said the company's home equity, credit card and commercial loan portfolios, which comprise about 50 percent of its total loan portfolio, were posting high-than-average loan losses compared to other large-cap banks, making its credit quality a reason of concern.

Shares of Wells Fargo were up 4 percent at $28.33 in morning trade Friday on the New York Stock exchange. They touched a high of $29.53 in early trade.

(Editing by Gopakumar Warrier)