Wachovia Corp.'s decision to acquire A.G. Edwards & Sons Inc. will force Prudential Financial Inc. to think about what it wants out of its investment in Wachovia Securities L.L.C.
Wachovia, Charlotte, N.C., a giant bank holding company, has agreed to scoop up A.G. Edwards, St. Louis, a large retail securities brokerage, through a deal with a total value of about $6.9 billion.
Wachovia plans to combine A.G. Edwards with its own Wachovia Securities business, locate the headquarters of the combined business in St. Louis, and operate the combined business under the Wachovia Securities brand.
The combined company would have a network of 15,000 financial advisors and a role in managing $1.1 trillion in client assets, with 3,000 of the reps coming from Wachovia Securities and about 12,000 from A.G. Edwards.
Wachovia hopes to complete the deal by the end of the year.
Prudential, Newark, N.J., has a financial interest in the A.G. Edwards deal because of the way Wachovia set up its last major Wachovia Securities expansion.
In 2003, Wachovia dramatically increased the size of its securities subsidiary by acquiring control over Prudential's old Prudential Securities business.
Wachovia put the Prudential Securities business in a joint venture. Wachovia owned a 62% stake in the joint venture, and Prudential kept a 38% stake.
Wachovia Securities continues to be a major distributor of Prudential annuities and other financial services products.
The terms of the 2003 joint venture agreement give Prudential a number of choices, Wachovia executives reported today in an investor presentation.
Prudential can:
- Make no capital contribution and end up with a smaller stake in the new, St. Louis-based Wachovia Securities.
- Contribute extra capital and end up with any level of ownership in the new Wachovia Securities up to 38%.
- Wait up to 2 years to make up its mind, and use a "look back option" to decide whether to contribute the extra capital needed to "true up" ownership of Wachovia Securities.
- Exercise a "put right" that could require Wachovia to buy out Prudential's stake in Wachovia Securities for a price based on the appraised value of Wachovia Securities. The put right price would exclude the value of the A.G. Edwards business, Wachovia says.
Prudential is not yet saying which alternative it will choose, but Prudential Vice Chairman John Strangfeld has proposed the A.G. Edwards deal.
"We are very pleased with our investment in Wachovia Securities and our partnership with Wachovia management," Strangfeld says in a statement that accompanied Wachovia's announcement of the A.G. Edwards deal. "We believe the combination of A.G. Edwards and Wachovia Securities is highly attractive and takes the business to a new level of prominence and promise. We have complete confidence in management's ability to make this deal successful."
Prudential has 20 business days to decide how to respond to the A.G. Edwards deal, according to Andrew Kligerman, a securities analyst at UBS Investment Research, New York.
"We think [Prudential] is 'in a good place,'" Kligerman writes in a comment on the deal.
Prudential has more than $6 billion in excess capital to invest, and Wachovia is projecting the A.G. Edwards deal will generate an internal rate of return of about 24%, Kligerman writes.
Wachovia's past success with the Prudential Securities integration mitigates concerns about A.G. Edwards' integration execution risks, Kligerman writes.
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