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Monday, September 29, 2008

Citigroup Acquires Wachovia Banking Operations

This morning the Federal Deposit Insurance Corporation (FDIC at announced that Citigroup (Citigroup Charts) will acquire the banking operations of Charlotte, North Carolina's Wachovia Corporation (WB.) This transaction was facilitated by the FDIC and concurred with by the Board of Governors of the Federal Reserve and Hank Paulson, the Secretary of the Treasury, in consultation with the President, George Bush.

Wachovia did not fail. Instead it was acquired by Citigroup Inc with assistance from FDIC. Comments from FDIC Chairman Sheila C. Bair:
"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits."

"On the whole, the commercial banking system in the United States remains well capitalized. 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."
Citi will pay Wachovia about $2.16B in Citigroup stock. Wachovia will continue to own AG Edwards and Evergreen which will add to this baseline valuation. The Citigroup shares give Wachovia a value of about $1.00 per share (Wachovia has 2.14B shares outstanding) plus whatever value the market assigns to the remaining assets.

Further terms of the agreement:
  • Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans.
  • The Federal Deposit Insurance Corp. will absorb losses beyond that in exchange for $12 billion in Citigroup preferred stock and warrants to compensate the FDIC for bearing this risk.

On the acquisition, Citi cut its quarterly dividend 50% to 16¢ a share . On an annual basis, the dividend was cut from $1.28 to $0.64 per share. At $20.00 a share, Citigroup yields 3.20%.

Citigroup also announced it will raise about $10B in new capital, further diluting stockholder equity.

Citigroup CEO Vikram Pandit said of the deal,
Citi will have more than $600 billion in deposits in the United States, giving us about a 9.8 percent 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 world’s largest core deposit-funded financial institutions.
On this deal with government backing, Citigroup became one of the "anointed banks" that the government has deemed worthy of FDIC assistance or too large to fail.

Citigroup traded as low as $19.44 near the open then quickly recovered to $20.00, down 15¢ from Friday's closing price.

Disclaimer: I own in my personal portfolio and have recommended trading Citigroup around a core position in "Kirk's Investment Newsletter Explore portfolio" that is on "house money" from buying in 1998 and taking significant profits (more than twice what I put into the stock) in July and August 2000. Since then, I have done some minor trading around the remaining shares as a core position. I my buy back some of the shares I sold eight years ago when it looks like the dust settles as these huge financial panics are usually exceptional times to buy the very best of the best that survive. To learn what I recommend for newsletter portfolios, subscribe now!

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