So, just when we thought chicken-little was still crowing, Wells Fargo scoops up ALL of Wachovia from the palm of Citigroup. In my view, this deal is a critical turning point. It’s a turning point primarily because it’s a view by a well regarded, well respected management team that the value of the WB franchise was more than perceived by a competitor, without government assistance. With this offer, WFC set a floor for those assets, which is above what the prior bid was and this is important, as until now, the direction of pricing was south NOT north.

An intriguing point to note within this deal structure is that Berkshire is the largest shareholder of Wells Fargo.  Mr. Buffett, a re-known value buyer has gotten knee-deep in financials over the last few weeks.  Most recently Goldman Sachs raised $10B, $5B in perpetual preferred to Berkshire with a 10% dividend and an option to buy $5B of common at a set price of $115 per share for 5-years.  Berkshire struck a similar deal with General Electric.  Another financial that Mr. Buffet has been a part of for quite some time is M&T Financial.

The deal announcement by Citigroup was for the banking operations of Wachovia.  While I raised my eye-brows this morning when this deal hit the tape, in terms of how can this be as C had it?  Perhaps this meant WFC was buying the brokerage and asset management units.  But no.  The revised deal with WFC is better for the shareholders of WB and the tax-payers or main-street, because they are not on the hook for anything. Recall the Citigroup offer included a loss sharing arrangement in that C would absorb up to $42B of losses on a $312B loan pool,and the FDIC would absorb losses beyond that point.  Also, C granted the FDIC $12B in preferred stock and warrants to compensate for the FDIC bearing this risk.

The announcement this morning is a definitive agreement, both boards have approved the deal to close in the fourth quarter 2008, and there is NO government assistance.  The two companies have a share exchange agreement which inlcudes WB issuing WFC preferred stock that votes a single class with WB’s common representing nearly 40% of the company’s voting power.  Wells Fargo will be issuing up to $20B of new securities which will be primarily common stock.  WFC’s proforma capital ratios are 6.1% leverage, 11.1% total capital and 3.7% tangible equity as a percentage of tangible assets.

This transaction should be accretive in year one for WFC, excluding charges, write-downs and the reserve build.  HMM? That’s a lot of items to exclude, but they will be conducting a full-fledged spring cleaning of this franchise.  The balance sheet adjustments include $74B of market value adjustments.  The merger and integration charges are expected to be $10B in this all stock transaction and expense saves should be $5B per year, representing 10% of the combined comapny expense base. 

WFC’s acquisition parameters have remained unchanged and include 1) accretive to EPS by year 3 and 2) an IRR of at least 15%.  This deal should exceed those hurdle rates, according to management.  In our view, WFC’s management team has proven over the years that they can price delas very well, they execute, and they build shareholder value.

On a proforma basis, the new WFC will have $1.4T in assets, $787B in deposits, $258B in assets under management, and takes the lead store/branch position in the U.S., ahead of both Bank of America and JP Morgan Chase.  Charlotte, which has become a formidable city for financial services firms, will be the headquarters for the company’s east coast retail, commerical, and corporate banking businesses.  Also, St. Louis will be the headquarters of Wachovia Securities.  The management team at WFC has integrated 280 transactions over the last two decades.

The FDIC Chairman Shelia Bair commented. “Since the close of our bidding process, Wells has apparently re-assessed it position and come forth with this new offer that does not require FDIC assistance.  It should be emphasized that both the Citigroup proposal as well as the new Wells proposal would stand behind all creditors including depositors, insured and uninsured.  Under either proposal, all banking customers of the merged institutions would be fully covered with no disruptionsin service.” “The FDIC stands behind its previously announced agreement with Citigroup.  The FDIC will be reviewing all proposals and working with the primary regulators of all three institutions to pursue a resolution that serves the public interest.”

So, an intriguing twist, but I remain in the camp of the Wells Fargo deal is better for ALL constituents.