Wachovia pursues Wells Fargo deal; Citi setback

NEW YORK (Reuters) - Wachovia Corp cleared a legal hurdle in its effort to sell itself to Wells Fargo & Co on Sunday when a New York appeals court ruled Wachovia cannot be forced to negotiate with Citigroup alone beyond Monday.

Citigroup and Wells Fargo are fighting over the right to buy Wachovia assets, a bank hobbled by the credit crisis but which has a desirable branch network. The legal battles Sunday come as the U.S. Federal Reserve is pushing the two banks to reach a compromise, perhaps by carving up Wachovia between them, according to a report in the Wall Street Journal.

Charlotte, North Carolina-based Wachovia is the latest casualty of a crisis that has led to shotgun sales of Bear Stearns Cos and Merrill Lynch & Co Inc, the near collapse of American International Group Inc, and the bankruptcies of Lehman Brothers Holdings Inc and Washington Mutual Inc.

Citigroup reached a preliminary agreement to buy Wachovia's banking assets for $2.2 billion in a deal backed by the U.S. government on Monday Sept 29. Wachovia did not sign an official merger agreement with Citigroup, although it did sign an agreement to negotiate exclusively with Citigroup through Oct 6.

But on Friday Wells Fargo -- the seventh-largest U.S. bank by assets -- said it signed an agreement with Wachovia to buy the entire company without the government's help, apparently besting the Citigroup offer.

Citigroup won a New York state court order late Saturday night that would have extended an agreement it had to negotiate exclusively with Wachovia. But an appeals court on Sunday overturned that order.

Wachovia said Sunday that its agreement with Wells Fargo is valid and proper, and is best for shareholders, employees and U.S. taxpayers. Wells Fargo said in a statement it has a binding merger agreement with Wachovia, and its deal, which keeps Wachovia intact, is better for all of Wachovia's stakeholders.

"We are confident that we will complete our announced merger with Wachovia," Wells Fargo said.

Earlier on Sunday, Wachovia asked a Federal judge for a temporary restraining order that would have prevented Citigroup from interfering with the Wells Fargo deal.

U.S. District Court Judge John Koeltl denied the request, but he said the court will hear on Tuesday whether or not the exclusivity agreement that Citigroup is citing prevented Wells Fargo from making the bid for Wachovia is enforceable.

George Frampton, a partner at Boies, Schiller & Flexner LLP representing Wachovia, said he believes the matter "is dead" in state court, and will be resolved in federal court.

"I'm confident we can resolve the legal issues by the end of the week in Federal court," Frampton said.

One of the earliest effects of the $700 billion bailout legislation passed by Congress last week could come in Wachovia's federal court case, which argues that a clause in the bill invalidates the exclusivity agreement the bank signed with Citigroup.

LET'S MAKE A DEAL!

Citigroup last week offered to significantly boost the price it was paying for Wachovia, the Wall Street Journal reported on Sunday, citing people familiar with the matter.

The proposal remains on the table, although the exact terms and structure of the sweetened deal are unclear, the newspaper said.

A spokeswoman for Citigroup declined to comment on the report.

Some lawyers believe that Citigroup could have a real case in working to block the Wells Fargo deal, noting the exclusivity agreement and the fact that Citigroup provided financial support to Wachovia last week.

"Those are clearly strong facts on Citi's side," Morton Pierce, chairman of the mergers and acquisition group at law firm Dewey & LeBoeuf, said on Friday. Dewey & LeBoeuf is not representing any of the parties in the transaction.

Late on Saturday, New York State Supreme Court Justice Charles Ramos granted an injunction extending Wachovia's agreement to negotiate exclusively with Citigroup.

Citigroup, which has sustained about $60 billion of write-downs and losses during the credit crunch, is eager to buy Wachovia's banking assets, which include more than 3,000 bank branches. Banks are eager to boost their branch networks, which can be a stable source of funding as bond markets prove to be an increasingly expensive and unreliable place to secure financing.

Citigroup is seeking $60 billion in punitive and compensatory damages against Wells Fargo for interfering with the deal, according to a person familiar with the matter.

Citigroup said in its statement on Saturday that it was prepared to continue negotiating with Wachovia, but that Wachovia may not speak to others.

Wachovia spokeswoman Christy Phillips-Brown said: "Citigroup is always free to make a superior offer to Wachovia."

(Additional reporting by Elinor Comlay and Jonathan Stempel; Editing by Kenneth Barry )

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