Citigroup Inc. (NYSE: C) has finally issued a statement on the interruption of its Wachovia Corp. (NYSE: WB) buyout.  Citi is saying that Wachovia’s agreement to a transaction with Wells Fargo (NYSE: WFC) is in clear breach of an exclusivity agreement between Citi and Wachovia.  As you read through the complaints, you are going to notice that this is going to be a government and private sector fight.  It will also become core case study material on public versus private bailout mergers.

Citi further says that Wells Fargo’s conduct constitutes tortuousinterference with the existing exclusivity agreement. That stated Wachovia wasnot to enter into any transaction with any party other than Citi, and would not participate in any discussions or negotiations withany third party.  Citi says that the exclusivity agreement alsoprovides that the parties would be irreparably harmed by any breach ofthe agreement.

What is interesting is that this statement states that the value of the Citiagreement to Wachovia shareholders was substantially in excess ofWachovia’s closing price on Thursday, and that Citi hasalso been providing liquidity support to Wachovia Bank since Monday’sannouncement. Citi is demanding that Wachovia and Wells Fargo notproceed with any proposed transaction.

Citi did not update the status of its $10 billion offering that has notyet come to market but said that it has strong liquidity, totaldeposits exceeding $800 billion and a Tier 1 capital ratio of 8.7% asof the second quarter.

We would make some key observations here and note that this will become a legal mess.  They can scream "bloody murder" all they want, but the winner hereshould be based on what is best for shareholders and for taxpayers. This morning we pondered whetherthe FDIC would get involved and also whether Citi would makelegal claims.  It now seems that both are likely.  But what is not certain is the outcome.

The Wells Fargo deal is not government sponsored and therefore does notcome out of the taxpayer till as long as no future implosions comefrom it.  The FDIC was going to share in Citi’s losses after the hurdlewas hit.  Wells Fargo is offering to do this on a standalone basis withno help from Uncle Sam.  Citi is also considered a troubled institutioneven if the government has included it as "being in the club" of banksthat will survive.  The biggest impact is for common stock holders.The common holders were going to get a shell of the asset managementassets with Evergreen and A.G. Edwards in the common stock while Citiwas getting to essentially take the deposits and banking assets.  TheWells Fargo deal is for the entire company and it appears that allholders of common stock, preferred shares, and debt will now come underthe Wells Fargo flag.  So, they can sell now and lock in or they canstay on as Wells Fargo shareholders rather than as a standaloneWachovia shell holders.

The outcome on this one is not going to come easily. Not by a longshot.  You can be assured that this will become core case studymaterial for capstone classes in universities.  This truly is proof ofthose "government-mandated mergers"we discussed earlier this year.  Now the private sector is saying, "Notso fast!" to the government.  This will also bring up the debate about whether the government can seize or do a private sector joint venture to seize what belongs to shareholders without notice.

Hold on to you chair here, this is goingto be a long ride.

Jon C. Ogg
October 3, 2008

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