Wells Fargo & CO’s (NYSE: WFC) efforts to follow Bank of America (NYSE: BAC) in the repayment of U.S. bailout funds may be delayed by a $5 billion debt that the company owes to Prudential Financial Inc. (NYSE: PRU), which could rain the company’s capital reserves or force the company to issue new securities, diluting current shareholders.
Wells Fargo, which received $25 billion in federal aid, must pay Prudential Financial for a 23% stake in the bank’s securities brokerage unit. Although the stake can be purchased for cash or stock according to a filing made by Prudential, most analysts believe that Wells Fargo will be forced to issues shares.
John Stump, Wells Fargo’s CEO, may seek to raise equity for the stake as the bank begins to exit the Troubled Asset Relief Program. Last week, Bank of America announced that it would repay its debt to the government and some believe that Citigroup is on the verge of announcing plans to repay its TARP funds as well.
Wells Fargo’s debt to prudential comes from a deal that was setup in 2003 between Prudential and Wachovia Corp to combine their retail brokerage units into a joint venture. Prudential had the right to sell its stake to Wachovia, an obligation that Wells Fargo picked up when it purchased Wachovia at the end of last year.
The company has said that it plans to remove itself from TARP in a “shareholder- friendly way,” which is code for an assurance that the bank won’t issue new dilutionary shares that would devalue existing investors stock value. That task may be difficult considering the bank’s purchase of Prudential’s stake. The U.S. is demanding that lenders, including Bank of America, raise equity y selling new stock before repaying its TARP obligations, which will dilute shareholders.
