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Citigroup lashes out at Wachovia-Wells deal

Citi cites Wachovia exclusivity pact, had provided liquidity this week

By Sam Mamudi, MarketWatch
Last Update: 2:09 PM ET 10/3/08

NEW YORK (MarketWatch) -- In a strongly-worded response to the news that Wells Fargo is buying Wachovia Corp., Citigroup Inc. claimed Friday that it had exclusive rights and claimed that Wachovia was not permitted to talk to anyone else.

Citi (C) also revealed that it had been providing liquidity support to Wachovia Bank this week, ever since a deal between the two banks had been agreed on Monday.

Citi said it had nearly completed the definitive agreements required to complete the deal. It demanded that Wachovia (WB) and Wells Fargo (WFC) "terminate" their agreement. "Citi has substantial legal rights regarding Wachovia and this transaction," it said.

A deal between Wachovia and Citi was unveiled on Monday. That deal would have seen Citi buy Wachovia's banking operations, with Citi receiving Federal Deposit Insurance Corp. protection against losses on $312 billion of Wachovia's more troubled assets. Wachovia is one of the largest holders of option adjustable-rate mortgages. See full story

"Wachovia's agreement to a transaction with Wells Fargo is in clear breach of an Exclusivity Agreement between Citi and Wachovia," said Citi in a statement. "In addition, Wells Fargo's conduct constitutes tortious interference with the Exclusivity Agreement."

"The Exclusivity Agreement provides, among other things, that Wachovia will not enter into any transaction with any party other than Citi, and will not participate in any discussions or negotiations with any third party," said Citi.

"The Exclusivity Agreement also provides that the parties would be irreparably harmed by any breach of the agreement and that the remedy of specific performance of the agreement is appropriate."

Shortly after it issued its statement, Citi released the Exclusivity Agreement. Read the Agreement

In a conference call Friday morning, Robert Steel, chief executive officer at Wachovia, addressed claims about a binding agreement with Citigroup by saying, "The controversy on this issue will be addressed in the appropriate way." He declined further comment.

One lawyer said that while the Agreement shows that Citi has a case, it's unlikely that it would be able to persuade a court to overturn the Wells-Wachovia deal.

"If Citi goes to court, how could they show lost profits in this market and with all those toxic assets [involved in the deal]?" asked Roger Cominsky, partner at law firm Hiscock & Barclay. "Talk about a pyrrhic victory. The court could say, 'Yes the agreement was violated, but your deal is dead and you don't have any lost profits.'"

Citi said when the deal was announced that it could have been exposed to potential losses of $42 billion as a result of the acquisition.

Cominsky said that if Citi was "serious" about blocking the deal, "they'd be filing a temporary restraining order right now." A Citi spokeswoman said she was not aware of any such filing being made.


In a move that reflects how Citi was blindsided by the Wells-Wachovia deal, Citi placed a full-page ad touting its deal with Wachovia in newspapers across the country on Friday, including USA Today.

"Citbank is honored to enter into a partnership with Wachovia," said the ad. "Together we will be part of the largest financial services company in the world."

Citi's acquisition would have seen it pay $2.16 billion in stock to Wachovia, plus the $12 billion in preferred securities and warrants it gave to the FDIC. In return, Citi would have received $448 billion of bank deposits -- a large source of stable funding.

At the time, Citigroup CEO Vikram Pandit said the acquisition offered a rare combination of potentially high returns and low risk.

But that deal has been trumped, with Wachovia instead agreeing late Thursday to merge with Wells Fargo in a deal that sees all of Wachovia folded into Wells Fargo. The new deal will not require any FDIC support, said Wachovia.

A source familiar with the situation said the Citigroup deal did not include a breakup fee, which would have made it more costly for Wachovia to break off discussions or a deal with Citi. See full story

Shares of Citi fell more than 12% in morning trading Friday, to below $20. As of 1.p.m., they were down about 10%, at about $20.30. Shares of Wells Fargo rose by more than 8%, to about $38.

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