Citigroup to acquire Wachovia

Citigroup announced today it would buy the banking operations of Charlotte, North Carolina-based bank Wachovia for approximately $2.16 billion in stock.

Under the terms of the agreement, Citigroup will acquire more than $700 billion of assets of Wachovia’s banking subsidiaries and related liabilities. The company will assume Wachovia senior and subordinated debt, worth around $53 billion.

The Federal Deposit Insurance Corporation (FDIC) will provide loss protection on around $312 billion of mortgage-related assets. Citi will take on the first $30 billion of losses on this portfolio, and expects to record these expected losses under purchase accounting when the deal closes. The bank will also be responsible for the next $12 billion in losses, up to a maximum of $4 billion per year for the next three years. In return for providing the loss protection, Citigroup will issue preferred stock and warrants to the FDIC with a combined value of approximately $12 billion.

“Wachovia did not fail; rather, it is to be acquired by Citigroup on an open bank basis with assistance from the FDIC,” the regulator said.

In its most recent quarterly results on July 22, Wachovia announced losses of $8.9 billion. Five-year credit default swaps on the bank ballooned on Monday to 1,020.4 basis points from 786.7bp on September 25.

The boards of both companies have approved the deal, which is subject to shareholder approval. The deal is expected to close by December 31 this year.

Citi announced the deal would be accretive to earnings from year one, excluding a total of $3.7 billion in pre-tax restructuring charges for severance over the next four years.

The bank said it would raise $10 billion in common equity to find the deal and reduce its quarterly dividend to 16 cents per share to maintain its capital position. On a pro forma basis for the second quarter ended June 30, 2008, Citi's Tier 1 capital ratio is expected to be 8.8% assuming completion of the transaction.

See also: JP Morgan acquires Washington Mutual