For those who have missed it, Citigroup announced almost two weeks ago an agreement in principle with Wachovia to acquire for $2.1 billion Wachovia’s retail banking operations. Four days later, Wells Fargo jumped the deal, announcing a merger agreement signed by both boards for Wells Fargo to acquire all of Wachovia. This violated an Exclusivity Agreement signed by Citigroup and Wachovia, so Citigroup marched Wachovia into court. A flurry of litigious activity ensued that weekend (the first weekend of October), with all parties announcing at the beginning of this past week a standstill agreement, as Wells Fargo and Citigroup tried to hammer out an agreement for each to acquire some of Wachovia’s assets.
Last night, Citigroup announced they were abandoning those efforts and resuming their legal wrangling. How will this play out?
1. The parties still have a date in New York state court for today, I believe. This court date was set by Justice Ramos in last weekend’s litigious festival. This court date is at the behest of Citigroup, regarding its claims against Wachovia (and WF) for violation of the Exclusivity Agreement.
2. Citigroup is claiming tortious interference against WF and tort and contract claims against Wachovia. For reasons I blogged about earlier, I think the tortious interference claims against WF are non-starters under the new bailout act. I believe Citigroup absolutely has claims against Wachovia, however. See #3.
3. We now know, based on Wachovia CEO Robert Steel’s court-filed affidavit, that Wachovia had two options when faced with Citigroup’s bid: Take the bid or be taken into receivership by the FDIC. The Citigroup option was clearly the best. However, the Citigroup bid was made after Wells Fargo had made a lot of noise about wanting to acquire Wachovia, only to bow out at the last minute. *If* Steel took the Citigroup bid, signed an Exclusivity Agreement with Citigroup, and negotiated with Citigroup all week while knowing that, if Wells Fargo circled back, Citigroup was not going to get a second glance, that is a problem. That stinks of bad faith behavior by Wachovia.
4. Courts have no problem holding boards to weak deals if the weak deal was the best possible deal in a dire situation. While I do not imagine a court will force Wachovia to sell its assets to Citigroup, I absolutely believe a court will impose damages on Wachovia for leading Citigroup to make a genuine bid while secretly waiting for a way out. Not. In. Good. Faith. Behavior.
5. Were I a betting woman, I would bet Citigroup will get a settlement from Wachovia of some amount over $100 million. Had Wachovia and Citigroup signed a binding Letter of Intent with a termination fee provision, Wachovia would likely have had to pay $50 million or so (2-3 % of the deal value) to walk away. But no such termination fee provision had been negotiated or agreed upon. Moreover, Citigroup is clearly miffed at this point. I think $100 million to walk away is a fair amount for Wachovia to pay for having created a “jilted lover” situation for Citigroup, which both damaged Citigroup’s market valuation and short-term credibility in the bidding market (not to mention having drained resources, time, and lawyers’ fees).