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Just Say No To Citi?

Apparently, not everyone is pleased by the Citigroup deal in which Citi would buy Wachovia Corp.’s bank branches, deposits and private bank, for $2 billion, or about $1 a share.

Apparently, not everyone is pleased by the Citigroup deal in which Citi would buy Wachovia Corp.’s bank branches, deposits and private bank, for $2 billion, or about $1 a share. That’s just one-tenth what the Wachovia shares were trading for on the Friday before the deal was done, and some shareholders—including a number of high-end Wachovia advisors—seem to think that they should hold out for more.

It worked at Bear Stearns, where an original price of $2 a share in its sale to JPMorgan was hiked to $10 just a week later by directors of both companies and the Federal Reserve. But some analysts say this time, a shareholder movement may not get very far.

One New Jersey-based advisor with a big book says he’s going to vote no, and wants to hold out for $15 to $20 a share: “I think we’re very positive that we’re no longer associated with a bank, but we’re upset it had to happen in this way, where we lost all the shareholder value. The FDIC completely forced this to happen. That’s bullshit.” This advisor, who had 100 percent of his deferred compensation in Wachovia stock—or several hundred thousand dollars—says there are a lot of Wachovia advisors who feel the same way.

And then there are the legacy A.G. Edwards advisors, some of whose retention packages contained 80 percent of Wachovia stock, says another Wachovia advisor with a lot of assets. Some of these guys actually decided to stick with Wachovia when the deal was done because it was a bank, he says, and now that’s gone. Non-employee shareholders aren’t too thrilled either, and some of them plan to vote against the deal as well, according to The Charlotte Observer.

Meanwhile, institutional investors own 73 percent of Wachovia shares, and have not yet commented on where they stand regarding the proposed deal. Prudential itself currently owns 23 percent of the combined operation, down from 38 percent prior to Wachovia’s acquisition of A.G. Edwards.

In response to questions about potential shareholder opposition to the deal, Wachovia would say only that, “As part of the process for completing the transaction, we will provide shareholders with more detailed information that will assist them in evaluating the transaction.” No date has been set yet for the shareholder vote.

Is the $1 a share price, hammered out in hasty negotiations on Sunday, September 28, with the help of the FDIC, a fair price? One difference between this deal and the Bear Stearns deal is that Citi is not getting all of Wachovia. Wachovia Securities, with its retail brokerage and asset management divisions, is now a standalone firm. In a research report on October 2, Deutsche Bank analyst Mike Mayo valued these businesses at $7 billion, or $3.20 a share, “about inline with the current valuation of the shares.” He did examine what the value of Wachovia’s branches, deposits and private bank were worth before the sale.

The government is also more heavily involved in the Wachovia deal than it was in the Bear deal because it insures Wachovia’s deposits, says John Jarrett, Research Director at GovernanceMetrics International. Bear was not a bank, and so it did not have deposits. “That’s why there’s more complexity involved, but it’s not to say it wouldn’t be possible,” says Jarrett.

Some say shareholders are lucky to have gotten anything at all. “It was either a dollar or insolvency,” says one top Wachovia advisor. Indeed, the FDIC probably would not have pushed the shotgun deal if the situation had not been dire. Among other things, Citigroup gets a damaged mortgage portfolio worth $312 billion, but Citi’s losses on that portfolio have been capped at $42 billion, with the government agreeing to take on any additional losses. In return, the government received $12 billion in warrants for Citigroup shares.

What’s next for Wachovia Securities? “There is some speculation that we may be bought by someone else, but since Monday it’s become clearer that Danny Ludeman wants the firm to remain independent,” says the New Jersey advisor.

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