Citigroup buys Wachovia’s banking unit
Citigroup's move to acquire Wachovia Corp.’s 3,300 branches highlights a remarkable turnaround for the bank, once one of Wall Street's most troubled institutions.
Two months ago, Citigroup Inc. appeared to be one the most troubled companies in finance. Its $55 billion worth of mortgage-related losses were the industry’s steepest; it had lost a jaw-dropping $130 billion in market value and was wildly selling assets to raise desperately needed cash.
On Monday, Citi bounced back in a shocking new role — financial savior — a status underscored by its move Monday to acquire Wachovia Corp.’s 3,300 branches.
The transaction was brokered by the federal government because it feared Wachovia would soon follow in the footsteps of Washington Mutual Inc., which failed last week.
The deal more than quadruples the size of Citi’s U.S. branch network and gives it another $500 billion in deposits, bringing Citi’s global total to $1.3 trillion.
For all of that Citi is paying precious little — $1 a share, just $2.16 billion in stock to Wachovia shareholders. The price reflects a 90% discount over where Wachovia’s shares closed on Friday. On the other hand Citi will take over $53 billion in Wachovia’s debt and will immediately write-off $30 billion in Wachovia’s mortgage-related assets upon closing the deal.
In addition, Citi is on the hook for another $12 billion of possible write-downs from Wachovia’s mortgage portfolio. Any losses beyond that, however, will be covered by the Federal Deposit Insurance Corp.
That could turn out to be a hefty burden for the government given that Wachovia’s $312 billion portfolio of mortgage-related assets is widely considered one of the sickest in banking.
The problem centers on Wachovia’s heavy exposure to ailing housing markets in Florida and California and its heavy amount of so-called Option ARM loans.
In exchange for protecting Citi from those possible future losses, the FDIC received $12 billion in preferred stock and warrants from the bank.
In addition to selling a stake to government, Citi said it is raising another $10 billion in fresh capital to cover potential losses by selling common stock. It will also cut its quarterly dividend in half to conserve cash, to 16 cents per share.
This marks the second time this year that Citi has slashed its dividend, and the latest capital-injections brings the total raised by Citi to over $70 billion this year.
The bank said it expects close fewer than 5% of its new branches, yet expects to generate cost savings of $2 billion. That number is equal to about 10% of Wachovia’s non-interest expenses last year, suggesting that there will be heavy job losses as a result of this merger.
Citi is not acquiring Wachovia’s A.G. Edwards retail brokerage unit or the Evergreen money management business. Presumably those assets will soon be put for auction or spun off to shareholders.
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