Wachovia jumps on Wells Fargo deal; AIG gains, but Citigroup weakens

By Rebecca Melvin

New York, Oct. 3 - Convertibles players were cheered Friday by unexpected news that Wachovia Corp. accepted a $15.1 billion all-stock buyout offer from Wells Fargo & Co. that doesn't rely on any government backing.

Wachovia convertible preferreds doubled in price to 700 on the news, before easing like much of the rest of the financial sector, and in tandem with stocks, later in the session.

"It was euphoric" trading, a New York-based sellside trader said of the initial response to the Wachovia news.

The overall financial sector was better bid early, although enthusiasm faded as the day wore on, traders said.

"This is the best and probably the first positive news for preferreds since the Fannie Mae/Freddie Mac conservatorship took that structure, and threw it out the window," a New York-based sellside trader said.

Other good news for preferred holders was that American International Group Inc. said it will continue to make preferred dividend payments. That provided a lift for the AIG mandatory convertible equity units as well.

But Citigroup Inc., which lost out on a Wachovia deal hammered out last weekend with backing from the Federal Deposit Insurance Corp., was weaker.

Elsewhere, the market was mostly quiet ahead of a U.S. House of Representatives' vote on a government financial rescue plan. Stocks were up ahead of the vote. But after its passage and then signature from president George Bush, stocks came off and convertibles were poised to head in that direction, traders said.

Alpha Natural Resources Inc. traded at 106, near its shares' session highs, but ended little changed as its shares retraced early gains to end up only a little higher.

Evergreen Solar Inc. convertibles were mostly quiet despite a jump in its shares early in the day. Its shares came off also however, to end the day lower by 2%.

Despite approval of the government's $700 billion financial rescues plan, credit markets remain virtually shut down, and the convertible primary market didn't appear even close to re-opening.

There's too much uncertainty, and any issuer would have to take too big of a discount for it to be worthwhile, one trader said.

Wachovia-Wells Fargo deal cheers market

Wachovia's 7.5% series L perpetual convertible preferred traded at 70 versus a stock price of about $6.50 on Friday, up from about 35 versus a share price of $3.91 on Thursday.

Later in the session it eased off to about 55 bid, 58 offered, which was termed "a more realistic level."

Wachovia common stock closed off its highs as well, but still managed to jump 59% to $6.21.

Wells Fargo struck a $15.4 billion deal to buy the Charlotte, N.C., bank four days after it agreed to a takeover by Citigroup at a much lower price.

Wachovia insisted there is nothing to stop it from forsaking the Citigroup deal, But Citigroup said it intended to sue on the grounds of a breach of the exclusivity agreement signed earlier this week.

The markets voted for the Wells Fargo offer by lifting the stocks of both Wells Fargo and Wachovia, and against the Citigroup deal, which saw its shares move lower.

Wells Fargo is offering $7 a share in stock for the whole company - not just the bank lending operations which was the case in the Citigroup deal - based on Thursday's closing price, that is 79% above where Wachovia shares finished. Wells Fargo also will assume Wachovia's preferred stock and debt.

Wells Fargo will also issue $20 billion in new securities, mainly common stock.

In contrast, Citigroup would have paid about a $1 per share for Wachovia and absorb up to $42 billion of losses on a $312 billion pool of loans owned by Wachovia. The FDIC would absorb losses beyond that.

In addition, Citigroup would grant the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

Citigroup's 6.5% convertible preferreds were lower outright but mostly in line on a dollar neutral basis to 39.25 at the close, versus a share price of $18.25, compared to 41.9 versus a share price of $22.50 on Thursday.

Shares of New York-based Citigroup dropped $4.15, or 18.44%.

AIG lifts with asset sale, dividend news

AIG's 8.5% mandatory convertible equity units due 2011 traded Friday at 14 versus a share price of $4.75 Friday, compared to 10 versus a share price of $4 on Thursday.

The mandatories closed lower Friday at about 11 versus a closing share price of $3.86, 4%.

The early climb was on word that the New York-based insurance giant planned to sell assets to lower debt, which was expected, and that it planned to continue to make preferred share dividend payments.

The company also said it plans to keep its U.S. property and casualty and foreign general insurance businesses, and also an ownership interest in its foreign life insurance operations.

Two weeks ago, when AIG was on the bring of collapse and the government stepped in with $85 billion in loan guarantees at Libor plus 850 basis points, the mandatories were at 6 versus a share price of $2.05.

Alpha Natural, Evergreen jump early

The market saw commodities and energy bid up a little early; but again, stocks sold off later in the session and bonds followed suit to end mostly weaker, a New York-based sellside trader said.

Alpha Natural Resources' 2.375% convertibles due 2015 traded at 106 versus a share price of $47.50 early in the session. But shares closed much lower at $42.25 and convertibles were also called lower at about 96.

Shares of the Abingdon, Va.-based coal company still ended the say higher by $1.75, or 4.3%.

Evergreen's 4% convertibles due 2013 were last at 58.75, and they didn't move despite a jump in their underlying shares early Friday. The convertibles and shares fell sharply in mid September on news that Lehman Brothers Holdings Inc., underwriter of the convertibles offering, had declared bankruptcy.

Evergreen had a share lending agreement and cap call transaction with Lehman Brothers and it's looking like it will have to file a claim in bankruptcy court to get any of what it's owed back under those agreements, according to comments by company officials to Prospect News Friday.

The claim will be whatever the value of the 30.9 million of shares is, plus $39.5 million in the capped call transaction. Evergreen said that it may file an even higher $70 million claim for the capped call transaction since that was the value of the transaction, even though Evergreen had only paid out $39.5 million at the time of the bankruptcy.

Evergreen still doesn't know whether it will have to count the borrowed shares in its earnings per share calculation for third-quarter earnings coming up, and is working with its accountants and legal counsel to determine what is required under the circumstances.

Mentioned in this article:

Wachovia Corp. NYSE: WB

American International Group Inc. NYSE: AIG

Citigroup Inc. NYSE: C

Alpha Natural Resources Inc. NYSE: ANR

Evergreen Solar Inc. Nasdaq: ESLR

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