Wells Fargo buying Wachovia for $15.1B; too late, Citi says

NEW YORK -- Wachovia wb broke its engagement with Citigroup c on Friday — potentially creating a thorny legal battle — by agreeing to sell itself to Wells Fargo wfc for stock valued at $15.1 billion.

They signed a definitive agreement to create a banking powerhouse serving 39 states with 10,761 stores, 48 million customers, $787 billion in deposits, and $1.42 trillion in assets. It would leap past JP Morgan Chase jpm and Bank of America bac to be No. 1 in domestic branches and deposits.

"The market presence and composition of our businesses, along with our service-oriented cultures, are extraordinarily complimentary and this combination creates great potential for sustained stability and growth," Wachovia CEO Robert Steel said.

Wachovia shareholders will receive 0.1991 shares of Wells Fargo for every share of Charlotte-based Wachovia stock they own, valuing Wachovia at about $7 a share. This is a nearly 80% premium over the stock's Thursday closing price of $3.91. Shares closed at $10 last Friday, the last trading session before the deal with Citigroup was announced.

The announcement sent Wachovia shares soaring about 74% at midday, to more than $6.80 — still vastly lower than the more than $51 it commanded a year ago.

But Citigroup said that Wells Fargo was too late, and demanded that its deal be scrapped: Wachovia had already agreed that it would "not participate in any discussions or negotiations with any third party" and that a breach of that agreement by Wachovia or Citigroup would leave the other company "irreparably harmed," Citigroup said in a statement.

Citigroup added that it has provided "liquidity support" to Wachovia since Monday, and has "substantial legal rights."

For Wachovia, though, "it seems like the legal risk of a potential lawsuit is offset by the better terms from Wells," says Keefe Bruyette and Woods analyst Jefferson Harralson.

U.S. banking regulators said Friday they will seek to resolve the rival acquisition proposals.

The Federal Deposit Insurance Corp. said it stood by the Citi deal, but at the same time left open the possibility of accepting Wells Fargo's proposal after reviewing it.

"It should be emphasized that both the Citigroup proposal as well as the new Wells proposal would stand behind all creditors including depositors, insured and uninsured," she said.

The Federal Reserve said it has not had time to review the proposed sale of Wachovia to Wells Fargo but will work to make sure that all creditors are protected.

The Fed issued a brief statement saying that while it and the Office of the Comptroller of the Currency had conducted an extensive review of the Citigroup deal, it had not yet had time to review the new offer from Wells Fargo.

News of the deal renewed optimism on Wall Street early Friday and helped trigger a rally that had the Dow Jones industrial average up more than 300 points. The rally collapsed even though the House of Representatives passed the $700 billion financial bailout plan as focus shifted back to the weak economy.

The companies said that the deal is better than the "agreement-in-principle" that Wachovia and Citigroup unveiled on Monday.

Citigroup said it would pay stock valued at $2.16 billion for Wachovia's retail bank, corporate and investment bank, and wealth management businesses — but not its brokerage or asset management firm.

Those two businesses "are tightly interwoven with Wachovia's core banking business — and this agreement avoids the complexity and unavoidable loss of value in trying to separate them," Wells Fargo Chairman Dick Kovacevich said in a statement.

The companies also say that the deal with Wells Fargo won't require special taxpayer support. The FDIC had agreed to protect Citigroup from some losses related to $312 billion in Wachovia's mortgage-related assets.

The news added to a busy week for investor Warren Buffett, whose Berkshire Hathaway holding company owns 9% of Wells Fargo.