Categories
Articles

It’s Citi and Wachovia & Ken Lewis Overpaid

CNBC’s Charlie Gasparino this morning called the merger “like two ugly girls kissing”.

Press Release

The WSJ Reports

Citigroup Inc. agreed to acquire Wachovia Corp.’s banking operations in another deal orchestrated by the federal government — this time by the Federal Deposit Insurance Corporation and one in which the agency could be on the hook for loan losses.

The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.

Citigroup also said it plans to sell $10 billion of common stock and slash its quarterly dividend in half to 16 cents a share to maintain a strong capital position, in the wake of its takeover of Wachovia’s banking operations.

They continued:

Over the past year, Citigroup has racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown. The company was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch. Its stock price has shriveled to less than $20, compared to more than $50 early last summer.

Citigroup is buying what the FDIC said is “the bulk of” Wachovia’s assets and liabilities, including five depository institutions, and assumes the company’s senior and subordinated debt. Not being sold are the A.G. Edwards brokerage division and Evergreen Investments operations.

The FDIC also has entered into a loss-sharing arrangement on a pre-identified pool of loans under which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC covering anything beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk.

Citi, like JP Morgan (JPM), got a lot for almost nothing. Citi was desperate to expand its deposit footprint and this deal does it, very cheaply.

Now that we look at these recent deals, it does appear more evident every day that Ken Lewis and Bank of America (BAC) vastly overpaid for Merrill Lynch (MER). Assets are being had at “give away” prices currently and Lewis did pay a huge premium to the then Merrill price when he agree to a deal. He reasoned at the time the price was cheap and wanted to snap it up. But, the questions needs to be asked, snap it up from whom?

Merrill was not actively being pursued by other institutions. I think no one could argue Lewis did not grossly overpay for Countrywide (CFC) when he both made his first investment and finally when he purchased the rest of it, he could have bought it out of bankruptcy had he waited.

Lewis has the deposit base to absorb the deal without hurting shareholders badly, the problem it that the upside to both deals is limited at best.


Disclosure (“none” means no position):Long C, none
Visit the ValuePlays Bookstore for Great Investing Books