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Citibank to Acquire Wachovia Banking Operations with FDIC Assistance; European Bank Rescues Announced
Separately, the governments of Belgium, the Netherlands and Luxembourg injected a total of €11.2 billion in various units of Fortis, with Belgium investing €4.7 billion in exchange for a 49 percent interest in Fortis Bank NV/SA, its Belgian arm, the Netherlands investing €4.0 billion in exchange for a 49 percent interest in Fortis Bank Nederland Holding N.V., and Luxembourg investing €2.5 billion in the form of a loan that converts into a 49 percent interest in Fortis Banque Luxembourg S.A. The terms of the rescue contemplate the sale of Fortis’ recently acquired interest in ABN Amro Bank NV. In Germany, it has been reported in the press that the German government, subject to German parliamentary approval, and a consortium of private banks have agreed to provide up to €35 billion of credit guarantees to prevent the failure of Hypo Real Estate Holding AG, one of Germany’s largest real estate lenders. Also the Icelandic government, citing short-term funding issues, announced that it has agreed to inject €600 million into the country’s third largest bank, Glitnir, in exchange for a 75 percent ownership stake. That transaction is subject to stockholder approval. Citigroup/Wachovia
Citigroup’s press release states that the parties have “reached an agreement-in-principle” for Citigroup to acquire all of Wachovia’s banking subsidiaries, including Wachovia’s “retail bank, corporate and investment bank and wealth management businesses.” Citigroup is not acquiring Wachovia Corporation itself, Wachovia’s interest in its Evergreen Asset Management unit or its Wachovia Securities joint venture with Prudential.
The announcements vary in their level of detail, but it appears clear that Wachovia Corporation will remain a public company with its existing common and preferred shares outstanding and will continue to operate its asset management, retail brokerage and certain portions of its wealth management businesses, including the Evergreen Asset Management and Wachovia Securities businesses.
Under the terms of the agreement-in-principle, Citigroup states that it will pay Wachovia approximately $2.16 billion in Citigroup stock and will assume Wachovia’s existing senior and subordinated debt (presumably including junior subordinated debt issued by Wachovia in trust preferred transactions), totaling approximately $53 billion. Since Wachovia will become a significant Citigroup stockholder in the transaction, two Wachovia directors will join Citigroup’s board.
Citigroup also announced that it “expects to raise $10 billion in common equity in connection with this transaction and reduce its quarterly dividend to 16 cents per share, effective immediately, to maintain the company’s strong capital position,” and that it “expects to realize more than $3 billion of annualized expense synergies through the consolidation of overlapping functions.”
The announcements also state that the transaction has been approved by the Citigroup and Wachovia boards of directors, but will be subject to approval by Wachovia's shareholders (presumably as a sale of substantially all of the assets of Wachovia Corporation). The Citigroup announcement also states that the transaction remains subject to definitive documentation, to “the occurrence of the closing by December 31, 2008,” regulatory approvals and “other customary closing conditions.”
The FDIC has agreed to provide certain loss protection in connection with approximately $312 billion of Wachovia’s mortgage-related and other assets. According to Citigroup’s announcement, Citigroup will be responsible for the first $30 billion of losses on the portfolio, and it “expects to record these expected losses under purchase accounting upon closing of the transaction.” Citigroup will also be responsible for the next $12 billion in losses, subject to a maximum of $4 billion per year for the next three years. The FDIC has agreed to be responsible for any further losses on the portfolio.
As compensation for the FDIC’s assistance, Citigroup has agreed to issue to the FDIC an unspecified number of shares of preferred stock and warrants having a “combined value of approximately $12 billion.”
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