Wachovia’s exclusivity agreement with Citigroup probably won’t block a deal with Wells Fargo. But it might give Citi an opportunity to offer a competitive bid.
We’ve now has a chance to review the exclusivity agreement between Citigroup and Wachovia. The letter is signed by executives for both firms, and is likely a binding agreement. In the letter Wachovia promises to negotiate a transaction on the basis of a non-binding term sheet and not to enter into any other negotiations or agreements for competiting bids until after October 6th, the target date to complete definitive documentation.
A note of caution: the enforceability of term sheets and exclusivity clauses is a venture into very uncertain territory. Even sophisticated business people and awyers are likely to give very different answers.
It seems pretty clear that Wachovia has violated the promise to abstain from negotitions. The penalty for this violation is “specific performance” of the promises in the letter agreement. Importantly, however, performing on the agreement only requires Wachovia to enter into good faith negotiations with Citi. It is not required to complete the transaction.
Because the term sheet is non-binding, Wachovia can demand any reasonable terms from Citi even if these depart from those in the term sheet. These terms could well include a higher price and any good negotiator should be able to come up with reasonable terms that would nonetheless be so onerous that Citi wouldn’t be able to agree to a final deal.
The practical effect of this could be to force Wachovia to negotiate with Citi for a few more days, possibly invalidating any agreement with Wells Fargo. But the Wells offer is out there, and there’s nothing to stop Wells from making the same offer after a few days. It looks to us like Citi has wound up with a right to make a counter-offer but little else.
Would Citi make a counter-offer? You might think that the Wells $7 dollar a share offer is so far above $1 a share Citi offered Wachovia investors that a counter-offer is all but ruled out. But the offers may not be as far apart as they seem. Citi also agreed to pay $12 billion in stock and warrants to the FDIC in exchange for the FDIC taking on anything over $42 billion of losses from Wachovia’s $312 billion loan portfolio. Citi shareholders, in other words, were willing to pay $14.2 billion for Wachovia, without its Wachovia Securities business. With the bailout deal now in place, the risk of losses from the loan portfolio is probably now far less frightening. Wells bid amounts to around $15.4 billion for the entire company, and it’s an all stock deal. It’s not unimaginable that Citi could come up with an additional $1.3 billion to beat the offer from Wells.
A more technical legal discussion is under way now about whether or not Wachovia has a duty to accept the Well Fargo bid, even if it violates the terms of its letter agreement. Here’s “Deal Professor” Steven Davidoff’s take:
The real question is whether Wachovia has a fiduciary out on the term sheet. Normally, the exclusivity agreement would allow for the Wachovia board to deviate if its fiduciary duties require it to do so. This agreement does not have it. In Delaware courts will normally still read this into agreements to override any constraints the board agrees to. This is because the court will not sanction an action which so violates fiduciary duties.
In normal times, and under Delaware law, Wachovia’s fiduciary duties might arguably require it to take the competing Wells Fargo bid if it is deemed superior. However, this issue will now need to be decided by a New York court applying North Carolina law – the law of Wachovia’s incorporation.
I would expect that Wachovia will also argue some other defenses, such as the exclusivity was meaningless at this point, since a deal would never be reached, and damages are limited since a shareholder vote would have been required anyway.
This also does not address any of the tortious conduct alleged by Citi against Wells Fargo. Here, Citi is not constrained by the choice of forum clause. The ball is now in Citi’s court.
What I don’t get is why Wachovia and Wells Fargo would do this deal now, instead of waiting until the agreement expired in three days. Maybe Wachovia couldn’t slow-walk the merger agreement with Citi and otherwise didn’t want to get hit with a breakup fee.