With FDIC as Midwife, Citigroup to Acquire Wachovia’s Banking Operations

In a transaction orchestrated by the Federal Deposit Insurance Corp., Federal Reserve and Department of the Treasury, Citigroup Inc. will acquire the banking operations of Wachovia Corp. According to Citigroup, the deal will make it the largest U.S. bank in terms of total deposits. The announcement by the FDIC noted that “Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.” For a payment of about $2.16 billion in stock, Citigroup will acquire the majority of Wachovia’s assets and liabilities, including five depository institutions, and will assume Wachovia’s senior and subordinated debt, totaling about $53 billion. Wachovia will remain a public company and retain its other operations, including Wachovia Securities; AG Edwards, the retail brokerage it acquired in October 2007; and Evergreen, its money management arm. Subject to approval by Wachovia’s shareholders and other conditions, the transaction is to close before the end of the year. The boards of directors of both companies have already approved the deal. Under a loss sharing agreement with the FDIC, Citigroup will absorb up to $42 billion of losses on a pre-identified $312 billion pool of loans, and the FDIC will absorb any losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the agency for bearing this risk. Of the $42 billion in losses, Citigroup expects to record the first $30 billion on the transaction’s closing. The rest will be handled as a maximum of $4 billion a year for the next three years. Citi announced that to maintain a strong capital position, it expects to raise $10 billion in common equity and immediately reduce its quarterly dividend to 16 cents per share. Once the transaction is done, Citi will have about 4,300 branches across the U.S. and about 3,300 elsewhere in the world. Because the two banks’ footprints do not overlap significantly, Citi has announced that it expects to close fewer than 5 percent of its total branches. Integration of retail banking is expected by the end of 2010. Citi has also indicated that it expects to save more than $3 billion in expenses annually by consolidating overlapping functions. “On the whole, the commercial banking system in the United States remains well capitalized,” FDIC Chairman Sheila Bair said in a statement. “This morning’s decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury. This action was necessary to maintain confidence in the banking industry given current financial market conditions.” Citigroup’s stock opened at $19.57 this morning on the NYSE, down from Friday’s close at $20.15, but was trading around 20.25 at 1 p.m. EST, having gone as high as 21.90 earlier in the day.