Wells to buy Wachovia for about $16 billion

NEW YORK (Reuters) - Wells Fargo & Co said on Friday it would buy Wachovia Corp for about $16 billion, apparently besting a government-backed Citigroup Inc bid for some of the bank's assets, in a deal that would catapult Wells Fargo into the ranks of the leading national consumer banks.

Citigroup, which had signed a deal to buy Wachovia's banking assets for about $2.2 billion, demanded Wells Fargo drop its surprise bid, insisting it had an exclusivity agreement with Wachovia.

Regulators said Friday they had not looked at the Wells Fargo bid, which would not require government financial support.

Wachovia would give Wells Fargo a strong branch presence on the East Coast, patching a major gap in its network. U.S. banks have been scrambling to boost their branch networks, which allow them to raise money from depositors since the credit crunch has made borrowing in bond markets increasingly expensive.

Wells Fargo is one of the few major U.S. banks that has remained consistently profitable during the credit crisis, while Citigroup has posted more than $17 billion of net losses in the last three quarters.

The Wachovia deal could have instantly turned Citi into a retail powerhouse in the United States while propping up Wachovia, which looked increasingly wobbly after the collapse of Lehman Brothers Holdings Inc. Citigroup has a relatively small branch network in the United States.

"For Citigroup, this is a real loss ... This was a deal that was going to save them as much as it was saving Wachovia," said Cassandra Toroian, chief investment officer at Bell Rock Capital in Paoli, Pennsylvania.

Citi said in a statement it has been providing support to Wachovia since it announced the deal Monday, and it demanded that the transaction between Wells Fargo and Wachovia be terminated.

On a call with investors, Wells Fargo executives said they had been in talks with Wachovia before the Citi deal was announced, and had looked at data that Wachovia offered, but did not talk to the bank after the Citi deal was made public.

In a joint statement, bank regulators at the U.S. Federal Reserve and the Office of the Comptroller of the Currency said, "The regulators will be working with the parties to achieve an outcome that protects all Wachovia creditors, including depositors, insured and uninsured, and promotes market stability."

Citi's shares fell 8 percent to $20.70 on the New York Stock Exchange. Wells Fargo rose 5.5 percent to $37.08, while Wachovia rose 70 percent to $6.65, also on the NYSE.

BIG PREMIUM

For each share of Wachovia, investors will receive 0.1991 Wells Fargo share, which is equal to $7 a share based on Wells Fargo's closing price on Thursday of $35.16. Wachovia closed at $3.91 on Thursday, meaning that Wells Fargo is paying a 79 percent premium to Thursday's closing price.

Wells Fargo said it will raise up to $20 billion, mainly of common equity, to maintain its capital position. It said it expects to incur merger and integration charges of about $10 billion.

Citigroup had planned to sell $10 billion of common equity as part of its acquisition.

Analysts said that Wells Fargo would be boosting exposure to consumer credit at a time when other companies have been warning of rising losses in credit card portfolios and consumer loans.

"Near term, the execution risk is high because of the current economy and the credit conditions of both these companies," said RBC Capital Markets analyst Gerard Cassidy.

"This deal enables us to keep Wachovia intact and preserve the value of an integrated company, without government support," said Wachovia President and Chief Executive Robert Steel.

Wachovia's board approved Wells Fargo's offer Thursday night.

The combined company will base its East Coast retail and commercial and corporate banking business in Charlotte. St. Louis will remain the headquarters of Wachovia Securities.

Wells Fargo, which would retain its name once the banks combined, is based in San Francisco.

(Additional reporting by Mark Felsenthal, Elinor Comlay and Ed Tobin; editing by Jeffrey Benkoe)

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