Citi rattled as rival steals its thunder

When he received an early morning phone call telling him that Wells Fargo had just trumped Citigroup's government-brokered $2.2bn deal to buy Wachovia, a senior Citi executive thought he was having a bad dream. But as he awoke fully, reality dawned on him: his company had been blindsided by a blitz from Wells for Wachovia - a bank that Citi thought it had in the bag 48 hours earlier.

Wells, which abandoned talks to acquire Wachovia last week, made its surprise move at 9pm on Thursday night when Dick Kovacevich, its chairman, called Robert Steel, Wachovia's chief executive, with details of the $15.1bn all-share bid, according to people close to the situation.

Some insiders say that Wells had contacted regulators earlier and regulators had told Wachovia it might receive an unsolicited offer.

Mr Steel hastily convened a board meeting by phone and after hours of discussions, Wachovia, the sixth-largest lender in the US, was ready to switch horses.

The news sparked an angry reaction from Citi, whose executives had been with Wachovia's top brass, including Mr Steel, on Thursday to thrash out details of their own merger.

The US financial services group said Wachovia's decision to swap partners was in breach of an exclusivity agreement.

Citi is still considering whether to raise its $1-a-share bid for Wachovia, according to people close to the situation, but it has also issued a thinly veiled threat to take legal action to stop the transaction or demand damages.

The exclusivity agreement, seen by the Financial Times, states that Wachovia "shall not . . . solicit, initiate or take action to facilitate or encourage the submission of any acquisition proposal [or] enter into or participate in any discussions or negotiations".

The document, which was signed by Gary Crittenden, Citi's chief financial officer, and Jane Sherburne, Wachovia's general counsel, was due to expire on Monday, according to a handwritten note initialled by Ms Sherburne.

Wachovia declined to comment on the exclusivity agreement and John Stumpf, Wells Fargo's chief executive, told Wall Street analysts that he was not aware "of any merger agreements that have been consummated".

Mr Stumpf, who was advised by JPMorgan Chase and the renowned law firm of Wachtell, Lipton, Rosen & Katz, said he was confident the deal for Wachovia, which has been advised by Goldman Sachs and Sullivan & Cromwell, had been "done appropriately."

But if Citi follows through with its threat to take legal action, that decision could be out of Mr Stumpf's hands.

Citi insiders yesterday pointed to the Texaco/Pennzoil case as supporting their argument.

In 1984, Texaco trumped a $2.6bn deal by Pennzoil to buy a stake in Getty Oil with its $10.1bn proposal to buy the whole company. Texaco claimed Pennzoil and Getty had only had an agreement in principle, not a legally enforceable contract. Pennzoil sued, and won $10.53bn, claiming the loss of a "significant and valuable business opportunity."

However, Wachovia's advisers argued that its management was duty bound to present Wells' offer to the board. The board, for its part, felt it could not justify rejecting a higher bid to its shareholders, partly because the agreement with Citi had come under pressure from regulators.

American banks in Wachovia face-off

Citigroup said it had been granted “emergency injunctive relief” from the Supreme Court of the State of New York to extend the exclusivity agreement governing its $2.1bn takeover bid.

Wachovia and Wells Fargo denied the court order had any effect on their agreement, which Wells called “firm” and “binding”.

The fight comes after the bank’s board agreed to a takeover by Wells Fargo on Thursday, three days after Citigroup appeared to have agreed its own government-assisted deal with the company.

Citigroup moved to block the merger, claiming it had “legal rights” and had been giving Wachovia liquidity support throughout the week.Wachovia had committed not to negotiate with other parties until tomorrow at the earliest.

Citigroup reportedly offered to significantly increase its bid, but that was rejected, according to the Wall Street Journal.

The legal battle comes at what some commentators suggest is the worst possible time for the US government.

While its $700bn bank bail-out was pushed through Congress on Friday, it is still relying on America’s biggest remaining banks, including Citigroup and Wells Fargo, to support its plans and provide liquidity.

On attaining the court ruling, which Wachovia had tried to block, Citigroup said it would “continue negotiations with Wachovia on the previously agreed-to transaction”.

Wachovia and Citigroup have been ordered to appear before the New York court on Friday.

Citigroup, Wells May Carve Up Wachovia in Compromise, WSJ Says

Citigroup Inc. and Wells Fargo & Co., prodded by U.S. regulators, may divide up Wachovia Corp. to end a takeover battle that's disrupting a federal rescue of the ailing North Carolina bank, the Wall Street Journal reported.

Officials from the Federal Reserve and Treasury are involved in the talks while executives of Charlotte, North Carolina-based Wachovia have been excluded, the Journal reported, citing people familiar with the situation. Citigroup would get Wachovia's branches in the northeast and mid-Atlantic regions and Wells Fargo may take the Southeast and California, the newspaper reported. The asset-management and brokerage units would go to Wells Fargo.

Citigroup, the biggest U.S. bank by assets, is bidding for Wachovia while trying to rebuild after $61 billion of losses tied to the collapse of mortgage markets. The bank wants to buy parts of Wachovia for about $2.16 billion, while Wells Fargo is bidding about $15 billion for the whole company. Wachovia said Wells Fargo's bid is better for investors, workers and taxpayers because, unlike Citigroup, it doesn't rely on government aid.

Under the split being discussed now, neither New York-based Citigroup nor San Francisco-based Wells Fargo would get U.S. financial assistance, the Journal said.

The two suitors have spent the weekend wrangling in state and federal court over Wachovia, with Citigroup winning a New York state ruling on Oct. 4 that said it had the exclusive right to negotiate a takeover until Oct. 10. That ruling was overturned on appeal today, leaving the original expiration date of Oct. 6 in place.

``We are pleased that the unfounded order entered yesterday has been vacated,'' said a Wells Fargo statement. ``Wells Fargo will continue working toward the completion of its firm, binding merger agreement with Wachovia.''

Competing Offers

The takeover battle began Sept. 29 when Citigroup made its bid with backing from the Federal Deposit Insurance Corp. to rescue Wachovia from declaring bankruptcy, according to documents provided by Citigroup. Wells Fargo, which said it was unable to complete a competing bid in time to be considered, returned with its higher offer later in the week, which Wachovia accepted.

Citigroup said this violated a signed agreement not to solicit new offers. New York State Supreme Court Justice Charles Ramos sided with Citigroup, and he extended the exclusive right to negotiate from the Oct. 6 expiration to Oct. 10 when he scheduled a hearing on the merits.

Wachovia said yesterday in a complaint filed in the U.S. district court in New York that FDIC Chairwoman Sheila Bair, who initially agreed to provide financial support to the Citigroup bid, later helped broker the deal with Wells Fargo.

`Serious Attention'

On Oct. 2 at about 7 p.m., Bair called Wachovia CEO Robert Steel and told him to expect a call from Wells Fargo Chairman Richard Kovacevich regarding the bank's offer of $7 a share, according to the complaint. Bair encouraged Steel ``to give serious consideration to that offer,'' according to the Wachovia court filing.

``Officials from both the Treasury Department and the Federal Reserve also contacted Wachovia's lead outside counsel to inform him that the offer from Wells Fargo was forthcoming and that Wachovia should give it serious attention,'' according to the complaint.

Andrew Gray, a spokesman for the FDIC, didn't return a message left on his mobile phone seeking comment.

`Simpler, Easier'

Steel said in a separate affidavit that he agreed to the Wells Fargo deal partly because the FDIC was threatening to put its banking operations into receivership if a ``definitive merger agreement'' with either Citigroup or Wells Fargo wasn't signed by Oct. 3.

Wachovia's discussions with Citigroup had ``proved extremely complicated and difficult,'' whereas Wells Fargo's offer was ``simpler, easier for shareholders to understand, more likely to close and more likely to receive shareholder approval,'' Steel said.

After Wachovia's board approved Kovacevich's offer, Bair and Steel together phoned Citigroup CEO Vikram Pandit to say that Wachovia had agreed to the Wells Fargo deal, Steel said.

Separately, U.S. District Judge John Koeltl put off ruling on whether Wells Fargo may proceed with its takeover bid. A hearing was set for Oct. 7, at which another federal judge will be asked to decide the case.

Federal Case

Wachovia took the case to federal court, and at the emergency hearing yesterday, David Boies, a lawyer for Wachovia, asked Koeltl to decide whether language in the $700 billion federal bailout law for the banking industry enacted last week permits Wells Fargo to make a new bid.

Koeltl said it ``appears'' Wells Fargo is correct, adding that a judge who is to be permanently assigned to the case this week may reach a different conclusion.

Wachovia spokeswoman Christy Phillips-Brown said the bank was ``pleased'' that the judge granted its request for a quick resolution, while Citigroup's Shannon Bell said the company was ``very pleased that Wachovia's motions for emergency injunctive relief and a temporary restraining order were denied.''

Citigroup dropped $4.15 to $18.35 on Friday in New York Stock Exchange composite trading, after having its biggest share decline in about 20 years. Wachovia rose 59 percent to $6.21. Wells Fargo declined 1.7 percent to $34.56.

Steel's Stake

Wachovia CEO Steel, 57, stands to benefit from any improvement in bids for Wachovia. Recruited from the Treasury department in July to rebuild the lender's credibility with investors, he bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Wells Fargo's bid won endorsement from stakeholders including Davis Selected Advisers LP, the Dodge & Cox mutual fund group and the Sandler family, according to a statement.

The Sandlers sold Golden West Financial Corp. to Wachovia in 2006 for about $24 billion, when Wachovia was run by CEO Kennedy Thompson. The unit's option-ARM home loans have since been blamed for contributing to Wachovia's record quarterly losses and Thompson lost his job.