Wachovia Bank could find itself dinged by a piece of the rock should insurance giant Prudential Financial choose to exercise an option to force the bank to buy it out of a retail brokerage joint venture.
Already buckling under the weight of billions in bad mortgages and seeing its stock price crater, Wachovia faces another potential headache should Newark-based Pru sell back its stake as a part of a joint-venture deal struck in 2003.
Under the terms of the five-year-old arrangement, which fused Pru’s retail brokerage operation with Wachovia’s brokerage platform, Pru starting tomorrow can force Wachovia to buy its 23 percent stake in their partnership, which some analysts value at around $5 billion.
That could be bad news for Charlotte, NC-based Wachovia, which in April reported a $707 million first-quarter loss on subprime mortgages and was forced to cut its dividend 41 percent. More mortgage pain is expected as the bank prepares to release its second-quarter earnings late next month.
A bright spot for both Wachovia and Prudential has been the strong performance of the retail brokerage venture, which exists under the Wachovia Securities banner.
At the time the deal was struck, Wachovia had a 62 percent stake in the venture, with Pru maintaining the remainder. But Wachovia’s purchase last year of AG Edwards, which has been integrated within the combined securities operation, reduced the size of the Newark insurer’s stake.
Prudential will have the option of increasing its stake or selling it once the brokerage unit has been appraised. Wachovia can use stock, cash or both to make good on its contract, and would have up to 12 months before it would have to do so.
So far, Pru has not revealed its intentions and could in fact increase its stake in the venture to 38 percent. But should it elect to sell, it could be a big blow to Wachovia, which has been rocked by the subprime mortgage crisis.
Pru has said that it is very happy with its Wachovia venture because it continues to be a huge revenue generator.
Spokespersons for both Wachovia and Pru declined to comment.