Citi has reached an agreementin-principle to acquire all of the banking subsidiaries of Wachovia Corporation, creating the largest US bank by total deposits.
Wachovia will remain a public company and retain its asset management, retail brokerage, and certain select parts of its wealth management businesses, including the Evergreen and Wachovia Securities franchises. Going forward, Wachovia expects to have adequate capital to support its remaining businesses, an appropriate allocation of tangible equity, and certain tax assets that will be recognized immediately. Under the terms of the agreement-in-principle, Citi will pay Wachovia approximately $2.16 billion in stock and assume Wachovia senior and subordinated debt, totaling approximately $53 billion.
Citi will acquire more than $700 billion of assets of Wachovias banking subsidiaries, and related liabilities. The Federal Deposit Insurance Corporation (FDIC) has agreed to provide loss protection in connection with approximately $312 billion of mortgage-related and other Wachovia assets. Citi is responsible for the first $30 billion of losses on this portfolio, and expects to record these expected losses under purchase accounting upon closing of the transaction. Citi is also responsible for the next $12 billion in losses up to a maximum of $4 billion per year for the next three years. Citi has also agreed to issue to the FDIC preferred stock and warrants with a combined value of approximately $12 billion. The FDIC has agreed to be responsible for any further losses on this portfolio.
The transaction, which has been approved by the Boards of Directors of both companies, is subject to: approval by Wachovias shareholders; to the occurrence of the closing by December 31, 2008; definitive documentation; regulatory approvals; and other customary closing conditions.
The deal is expected to be accretive to Citis earnings from year one excluding a total of $3.7 billion in pre-tax restructuring charges for severance over the next four years, and expected to be fully accretive in 2010.
Citi 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 companys strong capital position. On a pro forma basis for the second quarter ended 30 June 2008, Citis Tier 1 capital ratio is expected to be 8.8% assuming completion of the transaction.
“The transaction is extremely attractive from a strategic perspective. It will deliver the combined capabilities of two powerful organizations to our customers and shareholders, providing meaningful EPS accretion and downside loss protection” says Vikram Pandit, chief executive officer, Citi. “It will augment our access to stable funding and liquidity, and will accelerate our efforts to establish Citi as the worlds leading global financial institution. Citi will have more than $600 billion in deposits in the U.S., giving us about a 9.8% market share. Our total deposits will be $1.3 trillion globally, $350 billion more than our next largest U.S. competitor, making us one of the worlds largest core deposit-funded financial institutions. Moreover, it is essential that Wachovia, a company we deeply respect, maintain a strong presence in Charlotte, N.C”
“Our core businesses continue to perform well but amid uncertain markets and a fast-changing industry landscape, we found in Citi a strong partner to preserve the stability and quality of our banking franchise” says Robert Steel, CEO, Wachovia. “We are pleased to meet these key goals, as well as advance our legacy of innovative thinking, best-in-class customer service, and growth opportunities for our colleagues”
At the completion of the transaction, Citi will have: about 4,300 branches in the US and approximately another 3,300 throughout the world; and 28,000 fee-free ATMs in the US As there is little overlap between the two footprints, Citi expects to close less than 5% of the combined branches. In addition, Citi will benefit from Wachovias leading technology platform, including the opportunity to expand its award-winning online banking platform, and proven integration capabilities.
The transaction also brings a complementary US cash management platform to Citis international Global Transaction Services business; a US mid-market corporate banking franchise; and, a small, private banking business that Citi intends to integrate into its existing Global Wealth Management business.
In addition, Citi expects to realize more than $3 billion of annualized expense synergies through the consolidation of overlapping functions. Following the closing of the transaction, Citi expects to complete the integration of the retail banking operations by year-end 2010.
D.C.