Wachovia has reneged on its deal with Citigroup, opting to accept a bid from Wells Fargo instead. 10/06/08 My, how times change. Seems that while Citigroup had made their bid just for Wachovia's banking operations — hence, the relatively small $2.2 billion price tag — Wells Fargo went them one better, offering to buy every bit of Wachovia for $15.1 billion. And apparently, that includes the banking group that was going to go to Citigroup. Sullivan & Cromwell advised Wachovia on the deal, with Wachtell Lipton Rosen & Katz representing Wells Fargo. This is a stunning turn of events for all the parties involved, considering that it's only been four days since Citigroup announced their bid. That announcement solidified the markets for a brief spell, as the fallout from a Wachovia failure would have been immense. But nothing's settled just yet. Within minutes of the announcement of the Wells Fargo deal, Citigroup started threatening a legal challenge, alleging that the deal is in ''clear breach'' of an ''exclusivity agreement'' signed between Wachovia and Citigroup when the Citi-Wachovia deal was in the works. The relevant language stated, in part: ''[Wachovia agrees not to] enter into or participate in any discussions or negotiations with…any third party that is seeking to make, or has made, an Acquisition Proposal.'' Wachovia has already replied that, yeah, the language says what it says, but their fiduciary duty to their shareholders meant that they had to take Wells Fargo's higher offer. Since Citigroup is, according to the Wall Street Journal, considering raising their bid, this may well touch off a bidding war for Wachovia. Most taxpayers, except for possibly Wells Fargo shareholders, would likely prefer the Wells Fargo deal. Citigroup's bid was backstopped by the FDIC, potentially leaving the American taxpayer holding the bag for billions in bad loans. Wells Fargo's bid cuts out the FDIC altogether, potentially saving taxpayer dollars. From a legal point of view, Wells Fargo estimates a $10 billion hit to integrate the two banks. Much of that cost will be in legal fees, no doubt, and before any integration can even happen, a massive lawsuit from Citigroup appears likely. The likely question will be on specific performance as a remedy and whether fiduciary duties can authorize a breach of contract in New York. In any event, Davis Polk & Wardwell, Citigroup's chief legal advisor on the deal, appears to be on the verge of losing a huge chunk of business, and Skadden Arps, which is Citi's main counsel, will also likely lose out. Sullivan & Cromwell, meanwhile, appears to be at the center of this storm around Wachovia, so expect them to be very busy for a while, regardless of what happens. In the meantime, the rest of the financial and legal world shall look for some popcorn.

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