Fitch Ratings: AG Edwards Buy a Credit Neutral for Wachovia

Today, Wachovia Corporation (rated ‘AA-/F1+’ by Fitch Ratings) agreed to acquire A.G. Edwards, Inc. (AGE) for approximately $6.9 billion. While the enhancement to the retail brokerage franchise is viewed positively, Fitch anticipates that the transaction, in and of itself, will be neutral to Wachovia’s ratings, and will comment further when additional information becomes available. Fitch will particularly focus on how this transaction influences Wachovia’s approach to capital management, including share repurchases, dividends and capital mix. The increased size of the securities operations heightens the importance of Wachovia’s approach to capital allocation for this business.

Wachovia will combine the retail brokerage business of AGE into its Wachovia Securities, LLC unit. This transaction will substantially increase the scale of Wachovia Securities, placing it comfortably within the top three U.S. retail brokerage firms on various measures including net revenue, client assets (combined $1.1 trillion) and registered reps. Wachovia anticipates significant cost savings which Fitch views as achievable in light of AGE’s existing cost levels and Wachovia’s integration track record. More challenging will be Wachovia’s ability to retain the most productive brokers and their clients’ assets.

The agreement calls for a fixed number of Wachovia shares (0.9844 shares) plus $35.80 in cash for each AGE share (which should result in a price of about $6.9 billion), 60% in Wachovia stock, the remainder in cash. The transaction is targeted to close on Oct. 1, 2007, and will create approximately $4.5 billion in additional goodwill for Wachovia beginning in 4Q07.

Similar to Wachovia’s approach to its acquisition of Golden West Financial Corp in 2006, the company expects pro forma capital ratios to remain very close to current levels and within Wachovia’s previously stated targets, in part due to the use of newly issued common stock for much of the purchase price.

Of note, Wachovia Securities, LLC is majority owned by Wachovia Corporation (62%) while 38% is held by Prudential Financial. Possibilities exist for Prudential Financial to maintain or reduce its proportional ownership, or to exit via sale of its ownership to Wachovia, under the existing terms of the joint venture agreement.

Wachovia relies heavily on its proprietary economic capital models to determine its target ratios. Fitch considers many factors when assessing appropriate capital levels, including economic capital, and will evaluate the capital aspects of this transaction in more detail as better information becomes available.

Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
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