The combined brokerage, to be known as Wachovia Securities, would have 14,784 brokers, propelling it past Citigroup and ranking just behind Merrill Lynch.
NEW YORK: Wachovia on Thursday said it will buy AG Edwards for $6.8 billion in cash and stock, creating the second-largest US retail brokerage.
The combined brokerage, to be known as Wachovia Securities, would have 14,784 brokers, propelling it past Citigroup and ranking just behind Merrill Lynch & Co. Its $1.15 trillion of client assets would trail only Merrill and Citigroup.
Wachovia Securities expects to command a 14 per cent market share, operate 3,350 offices and employ 31,000 people.
"Brokerages are demographically attractive with the anticipated graying of baby boomers and increase in retirement assets," said Joseph Dickerson, an analyst at Atlantic Equities in London.
"Wachovia is also acquiring the advantage of more scale."
The terms value AG Edwards at $89.50 per share, a 16 per cent premium over the stock's closing price on Wednesday and about 21.5 times expected 2007 earnings. Through Wednesday, AG Edwards shares had already risen 22 per cent this year.
Shareholders would receive 0.9844 of a Wachovia share and $35.80 in cash for each of their shares.
Founded in 1887, St. Louis-based AG Edwards is the largest independent US brokerage, with 6,618 brokers and $374 billion of client assets. Wachovia Securities has 8,166 brokers and $773 billion of client assets.
Charlotte, North Carolina-based Wachovia, the No. 4 US bank, said the acquisition will expand its brokerage operations in 48 of the 50 largest US metropolitan areas. The combined brokerage would be based in St. Louis. Wachovia Securities is now based in Richmond, Virginia.
The purchase "allows us to leverage our investment banking, underwriting and origination capability," Wachovia Chief Executive Ken Thompson said on a conference call.
"We will get more mandates on the investment banking side simply because of the greatly expanded retail distribution we will have. (This) will also allow us to sell considerably more bank products."
He added, "This is an endgame for us. We've got everything we need right now to grow this business organically."
The deal comes eight months after Wachovia bought Oakland, California, thrift Golden West Financial Corp. for $24.2 billion, significantly expanding its mortgage operations.
In morning trading, AG Edwards shares rose $10.62, or 13.8 per cent, to $87.77. Wachovia fell 31 cents to $54.24.
Shares of Raymond James Financial Inc., the largest remaining independent brokerage, rose as much as 9.5 per cent.
Prudential Financial Inc., which has a 38 per cent stake in Wachovia Securities, said it supports the acquisition.
"It's a good deal for Wachovia," said Mark Batty, an analyst at PNC Wealth Management in Philadelphia, which invests $74 billion. "In retail brokerage, scale is key."
Wachovia Securities Chief Executive Daniel Ludeman will retain his title, while AG Edwards Chairman and Chief Executive Robert Bagby will be chairman of the combined brokerage.
"We've found a perfect partner," Bagby said on the call.
"We knew we needed scale, we knew we needed additional products (amid) a demand from our clients to have one-stop financial services. We could not provide that."
Wachovia expects the transaction to close in the fourth quarter, add 1 cent per share to its 2008 operating profit, and generate a 24 percent internal rate of return.
It expects $860 million of charges and $395 million of annual cost savings from the deal. It expects to close up to 230 offices and cut several hundred jobs for brokers with lesser training.
AG Edwards will pay Wachovia $270 million if the deal falls apart.
Credit Suisse, Wachovia's investment bank and the law firm Simpson Thacher & Bartlett represented Wachovia. Goldman Sachs & Co. and the law firm Wachtell, Lipton, Rosen & Katz represented AG Edwards.
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