Wells bids $15 billion for Wachovia; scuffles with Citi

By Dan Wilchins

NEW YORK (Reuters) - Wells Fargo & Co agreed to buy Wachovia Corp for about $15 billion, upstaging a government-backed Citigroup Inc bid for Wachovia's banking assets with a deal that would catapult it into the top ranks of national consumer banking.

Citigroup demanded Wells Fargo drop its surprise bid, which comes four days 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 signed an agreement to refrain from negotiating with other parties, even if the two parties had not signed a definitive merger agreement.

Wells Fargo Chairman Dick Kovacevich, in an interview with Reuters, said "We're confident that this deal goes through."

"We get sued all the time, and many times the suits are meritless," Kovacevich said, adding that the company's lawyers are still reviewing the relevant documents. Wells Fargo said it has signed a definitive agreement to acquire Wachovia.

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.

Citigroup's shares fell 18.44 percent, their biggest one-day drop since October 1987. The Wachovia acquisition would have helped it strategically, and the government-brokered deal also was seen as a vote of confidence from regulators.

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 be taking 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.

Citigroup was just bidding for Wachovia's banking assets, but Wells Fargo is also buying brokerage Wachovia Securities and asset manager Evergreen as part of this deal. Those businesses could also be hit by economic slowdown.