Wachovia Takeover Rests on Bail-Out

FRANCESCO GUERRERA & JULIE MacINTOSH
Financial Times 28sep2008

A takeover of Wachovia, the troubled regional lender, hinges on congressional approval of a proposed $700bn bail-out plan and the government’s willingness to extend financial aid to potential bidders, people close to the situation said.

Wachovia, led by its chief executive Robert Steel, continued talks with potential buyers including Citigroup, Wells Fargo and Banco Santander at the weekend in the hope of finding a merger partner.

However, people close to some of the bidders said they were reluctant to move until they knew details of the bail-out plan being discussed in Washington. Some bidders also want the government to step in and guarantee losses on more than $120bn of mortgages held by Wachovia.

However, the government has shown little appetite for such guarantees over the past few weeks, letting both Lehman Brothers and Washington Mutual fail.

Top Wachovia executives were in New York at the weekend for talks with Citi’s management. People close to the situation said that although Citi coveted Wachovia’s large branch portfolio, it did not want to saddle its balance sheet with troubled assets.

Citi has already recorded writedowns and credit losses of about $50bn, and shareholders are likely to object to any move that increases its risk profile.

But the purchase of Wachovia would boost Citi’s US retail banking operations, which have been underperforming rivals such as Wells and JPMorgan Chase. Vikram Pandit, Citi’s chief executive, recently appointed Terri Dial, a former executive at Wells and Lloyds of the UK, to revamp Citi’s retail offering.

People close to the talks said it was unclear whether Citi was the front-runner for Wachovia.

However, they said that some Wachovia executives favoured a tie-up with Citi because of the strength of its balance sheet.

Other potential bidders for Wachovia had also expressed an interest in WaMu, which was bought by JPMorgan Chase last week.

For San Francisco-based Wells, a Wachovia acquisition would be a radical departure from its two mantras of organic growth and geographical focus.

Santander is keen to expand in the US, and its relatively healthy balance sheet gives it financial firepower to buy Wachovia.

However, the fact that it is not a US bank could prevent it from receiving government help to clean up Wachovia’s balance sheet.

The banks declined to comment.

source: 28sep2008