NEW YORK (Reuters) - Citigroup Inc set a deal to buy regional powerhouse Wachovia Corp’s banking operations, one of several U.S. tie-ups triggered by the deepening financial crisis on Monday.
Banks are struggling to come to grips with a crisis that has led Goldman Sachs Group Inc and Morgan Stanley to rein in their high-risk business models, forced the shotgun sales of Bear Stearns Cos and Merrill Lynch & Co Inc and brought the bankruptcies of Lehman Brothers Holdings Inc and Washington Mutual Inc.
“It just seems that there are only going to be two types of banks in existence now: the ones that survive and get market share, or the ones that get gobbled up and have to be euthanized,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.
Citigroup’s $2.16 billion all-stock purchase of Wachovia assets was brokered by U.S. regulator Federal Deposit Insurance Corp. U.S. Federal Reserve Chairman Ben Bernanke said it would foster financial stability.
Also on Monday, Morgan Stanley sold a stake to Japan’s Mitsubishi UFJ Financial Group Inc.
“I wouldn’t think it (the bailout failing) would make any difference,” said Peter Kovalski, a portfolio manager and bank analyst at independent asset manager Alpine Woods Investments. “I think they’re getting (Wachovia) at a fire sale price, this is a once in a life time deal for Citi.”
Investors in Morgan Stanley, which agreed to sell 21 percent of itself to Mitsubishi, were particularly jittery, sending the bank’s shares down 15.2 percent
Japan’s largest bank will acquire 9.9 percent of Morgan’s common stock at $25.25 a share, or $3 billion. That’s 19 percent below its $31.25 book value at the end of August.
The Japanese bank also will buy $6 billion of convertible preferred stock, which pay a 10 percent dividend and have a conversion price of $31.25 a share. Morgan Stanley said the weighted average of the transaction values its shares at $29, or a 28 percent premium to its current price.
The deal shows how the worsening credit crunch is making even the largest financial players more cautious. MUFG’s announcement represents a slight change in plan since last Monday, when Morgan said it would sell an equity stake of as much as 20 percent for about $8.5 billion.
The terms for the Neuberger Berman deal also appear to be less favorable than expected.
The final price is likely lower than original estimates because some units were excluded, the market has fallen significantly and the businesses are being sold after Lehman’s holding company filed for Chapter 11 bankruptcy protection, said Michael Holland, founder of Holland & Co, which oversees more than $4 billion.
“It looks to be an attractive if not a bargain price,” said Holland. However, he said it was impossible to value without knowing the deals buyers struck with Neuberger to keep its portfolio managers — the money managers who create the revenues and profits for the business.
The U.S. dealmaking followed a tumultuous weekend in Europe in which the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government. In the U.S., Wachovia shares slid $8.16, or 81.6 percent, to $1.84.
The Wachovia purchase, including retail and investment banking operations, values the lender at roughly $1 per share.
Among regional banks, Cleveland-based National City Corp slid $2.35, or 63.3 percent, to $1.36, even after saying it had no need or plan to raise capital. Sovereign Bancorp Inc, a big savings and loan, tumbled $6.04, or 72.2 percent, to $2.33. The S&P Financials index was off 16 percent.
The broader stock market fell sharply with the Dow Jones industrial average down 777.68 points, its largest point decline in history. The Nasdaq Composite Index lost 199.61 points and the Standard & Poor’s 500 Index fell 106.59 points.
Additional reporting by Kristina Cooke, Elinor Comlay, Megan Davies and Juan Lagorio in New York; and John Poirier and Karey Wutkowski in Washington; Writing by Christian Plumb & Jack Reerink; editing by John Wallace, Tim Dobbyn, Gary Hill and Carol Bishopric