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Wells Fargo plans $10 billion stock offering
2008-11-05
NEW YORK - Wells Fargo & Co. said Wednesday that it will sell $10 billion worth of common stock in a public offering expected to price after the market closes on Thursday. The San Francisco-based bank has said it plans to raise up to $20 billion to maintain a strong capital position as it absorbs the operations of Wachovia Corp., which was on the brink of failure before the deal was struck last month. J.P. Morgan Securities Inc. is serving as lead manager on the deal. Other underwriters include Goldman Sachs, Morgan Stanley, UBS and Wachovia Securities. The underwriters have been given an overallotment option to buy up to 1.5 million additional shares. During a conference call with investors Wednesday, Wells Fargo executives reiterated that they expect $60 billion of cumulative credit losses for the life of Wachovia's $482.4 billion loan portfolio. They said the bank plans to record about $39.2 billion of those losses, or two-thirds of the total, at the close of the deal, which is expected by the end of the year. Due to a recent clarification from the Internal Revenue Service, Wells Fargo can use these losses to shelter years of profits. In late September, the IRS issued a surprise ruling that boosts banks' ability to offset the losses from loans and other bad debts held by banks they acquire by taking larger tax write-offs against future profits. Under the old ruling, companies could only write off a small portion of the losses, limiting how much of a tax benefit they could get. Additionally, Wells Fargo estimated that it will achieve about $5 billion in pretax expense savings by the third year after the acquisition. "This is not a fixer-uper in the traditional sense," said John Stumpf, Wells Fargo president and chief executive during the call. "We'll be de-risking the balance sheet and exiting some businesses and de-emphasizing some others." Wells Fargo's pending purchase of Wachovia puts it squarely in the top ranks of U.S. banking, along with Bank of America, JPMorgan Chase and Citigroup. By combining with the Charlotte, N.C.-based bank, Wells Fargo will have total deposits of $713 billion and more than 6,600 retail locations -- more than any of its rivals, according to presentation materials released Wednesday. The deal is still subject to Wachovia shareholder approval. A special shareholder meeting will be held sometime in December, according to the presentation. Wells' original offer for the Wachovia totaled about $15.1 billion, but it is now valued at about $13.6 billion due to the decline in Wells' stock price since the deal was announced Oct. 3. Citigroup had made an earlier bid to acquire Wachovia's banking operations for $2.1 billion with the assistance of the Federal Deposit Insurance Corp. But the New York bank later backed out of negotiations with Wells Fargo and regulators after the parties failed to reach an agreement over how to split up Wachovia. Wells Fargo said last month that its third-quarter profit fell 25 percent as it took hits on investments in troubled finance companies and increased its credit reserves, but results were better than analysts had expected. Wells Fargo has been weathering the current credit crisis much better than most of its peers, in spite of its prominence in California, one of the areas hardest hit by the housing bust. This is due in part to its minimal exposure to subprime mortgages. Defaults on those riskier loans have skyrocketed in the past year and a half as the housing market crumbled, forcing banks, like Wachovia, to write down billions in losses. Wachovia's troubles stemmed largely from its Pick-a-Pay loan portfolio, which the bank inherited through its $25 billion acquisition of mortgage lender Golden West Financial Corp. in 2006, at the height of the nation's housing boom. The current Pick-a-Pay mortgage loan balance totals about $122 billion, according to Wells Fargo. Wachovia previously projected total cumulative losses of $26.1 billion on this portfolio, with about 90 percent of the credit costs incurred by the end of next year. Wells Fargo, however, expects total losses of about $36 billion, based on internal housing valuation assumptions. Wells Fargo's board recently made an exception to its mandatory retirement age of 65 to let Dick Kovacevich remain chairman throughout the integration process. Wells Fargo shares fell nearly 9 percent to close at $31.68 on Wednesday. Shares fell $1.56, or 5 percent, to $30.12 in aftermarket electronic trading.
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