WELLS FARGO & CO. $31 (New York symbol WFC; Conservative Growth Portfolio, Finance sector; Shares outstanding: 3.3 billion; Market cap: $102.3 billion; WSSF Rating: Average) provides a wide variety of financial services to nearly eight million customers through roughly 6,000 branches and offices in 23 states. Internationally, it operates in Canada, the Caribbean and Central America. Warren Buffett’s Berkshire Hathaway holding company owns 9% of Wells Fargo’s shares. The company has now agreed to acquire WACHOVIA CORP. $5.71 (New York symbol WB, Conservative Growth Portfolio, Finance sector; Shares outstanding: 2.2 billion; Market cap: $12.6 billion; WSSF Rating: Extra risk). Wachovia stockholders will receive 0.1991 of a Wells Fargo common share for each Wachovia share they hold. The merger will make Wells Fargo one of the largest banks in the United States, with over 10,000 branches in 39 states and $713 billion in U.S. deposits ($787 billion in total deposits). It also gives Wells Fargo its first operations in the Atlantic Seaboard and southeastern U.S. As part of this new agreement, Wachovia has cancelled its earlier plan to sell its banking operations to Citigroup Inc. for about $2.1 billion in stock. Unlike the Citigroup deal, Wells Fargo will acquire all of Wachovia’s operations, mortgages, obligations and deposits. Citigroup will not try to block the deal with legal actions, but has instead filed a $60 billion lawsuit claiming breach of contract. The dispute could result in a settlement, with Citigroup receiving some of Wachovia’s operations.
Quick approval
Banking regulators have already approved the merger. As part of the deal, Wachovia will issue new preferred shares to Wells Fargo that will give it 39.9% voting power. That should ensure the merger closes by the end of 2008. Wells Fargo estimates that it will cost $10 billion to integrate the new operations. It plans to issue $20 billion in new capital, primarily common shares, to help cover these costs. Closing overlapping branches and combining other operations should also save Wells Fargo $5 billion a year by the end of 2010. The company can also use some of Wachovia’s losses to cut its own tax bill. Wells Fargo now plans to write down $74 billion of Wachovia’s $498 billion loan portfolio over the next two years. That’s a lot compared to Wells Fargo’s 2007 earnings of $8.1 billion or $2.38 a share. However, the federal government will help support the takeover, in part by buying $25 billion of new preferred shares from Wells Fargo. Wells Fargo will also gain control over Wachovia’s investment banking operations, including its wellknown A.G. Edwards retail brokerage and portfolio management business. It’s possible that Wells Fargo will try to sell some of these operations. That would raise cash and let it continue to focus on its main retail banking operations. Wells Fargo holds securities related to bankrupt brokerage firm Lehman Brothers and troubled government- sponsored mortgage lenders Fannie Mae and Freddie Mac. Consequently, it reported $646 million in writedowns for the third quarter of 2008. However, Wells Fargo’s strong reputation and new government deposit guarantees should continue to help it attract new customers and expand its deposit base.
Dividend still looks safe
If you disregard writedowns and other unusual items, Wells Fargo should earn $1.99 a share in 2008. The stock now trades at 15.6 times that estimate. The merger should not hurt Wells Fargo’s ability to keep paying its $1.36 dividend, which yields 4.4%. Wachovia investors should tender their shares to the Wells Fargo offer. Wells Fargo is a buy.
