Wachovia (WB) may be forced to buy Prudential out of its stake in a retail brokerage joint venture, the NY Post says. The deal, struck in 2003, gives Prudential the option to force Wachovia, which is already strapped for cash, to buy it out of its share of the venture. New York Post:
Under the terms of the five-year-old arrangement, which fused Pru’s retail brokerage operation with Wachovia’s brokerage platform, Pru starting tomorrow can force Wachovia to buy its 23 per cent stake in their partnership, which some analysts value at around $5 billion.
That could be bad news for Charlotte, NC-based Wachovia, which in April reported a $707 million first-quarter loss on subprime mortgages and was forced to cut its dividend 41 per cent. More mortgage pain is expected as the bank prepares to release its second-quarter earnings late next month.
How would this affect a possible Wachovia takeover by JP Morgan? Not clear, but it seems unlikely to help. If Pru demands a buy-out, Wachovia can pay using cash, stock, or a mix, and it has 12 months to do so. This flexibility is helpful, but still creates a major liability for Wachovia, whose stock just hit another 16-year low.
Here are the terms of the original agreement filed in Prudential’s 10-K:
Prudential and any Prudential Member shall have the right to require Wachovia, and Wachovia shall, or shall cause any Affiliate thereof designated by Wachovia, including any Company Entity, to purchase all (but not less than all) of the Interests in the Company held by all Prudential Members (the “Prudential Put”) upon any of the following events (each, a “Prudential Put Event”) at the prices indicated below (each, a “Prudential Put Price”)…
At any time after the second anniversary of the Closing Date and on or before the fifth anniversary of the Closing Date, at a price equal to the Cost Basis Price.
At any time after the fifth anniversary of the Closing Date, at a price equal to Prudential’s Percentage Interest of the Appraised Value of the Company…
Wachovia’s latest K says the joint venture generated 7.8 billion in revenue in 2007 and managed 1.2 trillion in assets.
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