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Citigroup buys Wachovia banking; deals abound

NEW YORK (Reuters) - Citigroup Inc agreed to buy Wachovia Corp’s banking operations, one of several major deals announced to bolster big financial companies troubled by bad mortgages or market turmoil.

Wachovia signs can be seen in front of a bank branch in New York, September 24, 2008. REUTERS/Lucas Jackson

The $2.16 billion all-stock transaction was brokered by the Federal Deposit Insurance Corp. U.S. Federal Reserve Chairman Ben Bernanke said it would foster financial stability.

Also on Monday, Morgan Stanley agreed to sell a stake to Japan’s Mitsubishi UFJ Financial Group Inc for $9 billion and bankrupt Lehman Brothers Holdings Inc agreed to sell its Neuberger Berman asset management unit for $2.15 billion.

Banks are struggling to come to grips with a crisis that has led Goldman Sachs Group Inc and Morgan Stanley to rein in their high-risk business models, the shotgun sales of Bear Stearns Cos and Merrill Lynch & Co, and bankruptcies of Lehman Brothers Holdings Inc and Washington Mutual Inc.

“It just seems that there are only going to be two types of banks in existence now: the ones that survive and get market share, or the ones that get gobbled up and have to be euthanized,” said Matt McCormick, a portfolio manager at Bahl & Gaynor Investment Counsel in Cincinnati.

Shares of Citigroup and many other U.S. banks tumbled after the U.S. House of Representatives rejected a controversial $700 billion U.S. financial industry bailout, and after European authorities stepped in to prop up several ailing lenders.


Investors in Morgan Stanley, which agreed to sell 21 percent of itself to Mitsubishi, were particularly jittery, sending the bank’s shares down 16 percent

Japan’s largest bank will acquire 9.9 percent of Morgan’s common stock at $25.25 a share, or $3 billion. That’s 19 percent below its $31.25 book value at the end of August.

The Japanese bank also will buy $6 billion of convertible preferred stock, which pay a hefty 10 percent dividend and have a conversion price of $31.25 a share. Morgan Stanley said the weighted average of the transaction values its shares at $29, or a 28 percent premium to its current price.

The deal shows how the worsening credit crunch is making even the largest financial players more cautious. MUFG’s announcement represents a slight change in plan since last Monday, when Morgan said it would sell an equity stake of as much as 20 percent for about $8.5 billion.

The Lehman deal was also on much less favorable terms than expected, reflecting the ongoing hit to valuations in the financial sector.

The final price is likely lower than original estimates because some units were excluded, the market has fallen significantly and the businesses are being sold after Lehman’s holding company filed for Chapter 11 bankruptcy protection, said Michael Holland, founder of Holland & Co, which oversees more than $4 billion.

“On the face of it... it looks to be an attractive if not a bargain price,” said Holland. However, he said it was impossible to value without knowing the deals buyers struck with Neuberger to keep its portfolio managers -- the money managers who create the revenues and profits for the business.


The U.S. dealmaking followed a tumultuous weekend in Europe which saw the governments of Belgium, the Netherlands and Luxembourg move to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.

British mortgage lender Bradford & Bingley Plc was brought under the government’s wing, while shares of French bank Dexia tumbled on a report that it might need emergency capital. Bank rescue deals also emerged in Iceland, Russia and Denmark.

In afternoon trading, Citigroup shares were down 79 cents or 3.9 percent, to $19.36 after earlier reaching $21.29. Wachovia shares tumbled 82 percent to $1.76 when then opened on the New York Stock Exchange in the afternoon.

Among regional banks, Cleveland-based National City Corp slid $2.16, or 58 percent, to $1.55, even after saying it had no need or plan to raise capital. The S&P Financials index was off 10.2 percent.

The Wachovia purchase, including retail and investment banking operations, values the lender at roughly $1 per share.

Additional reporting by Kristina Cooke, Megan Davies and Juan Lagorio in New York; and John Poirier and Karey Wutkowski in Washington