Citigroup Inc.'s rescue of Wachovia Corp. and its banking operations creates the third-biggest US branch network while aiding regulators seeking to prop up confidence in financial institutions.

The purchase gives Citigroup about 4,300 US offices and 3,300 worldwide. The bank will cut its dividend in half, to 16 cents from 32 cents, and raise $US10 billion ($12.3 billion). The stock deal, announced before rejection of a bank bailout sent US shares tumbling the most in 20 years, values Wachovia at $US1 a share.

Citigroup Chief Executive Officer Vikram Pandit, who has been shedding assets after reporting two straight quarterly losses totaling a record $US15 billion, said on a conference call the Wachovia acquisition made sense. The purchase will push New York-based Citigroup to third place among US bank networks, behind Bank of America Corp. and JPMorgan Chase & Co.

``It's certainly vaults them from being subscale to being a leader in domestic branch banking,'' Jeff Harte, an analyst at Sandler O'Neill & Partners in Chicago, said in a Bloomberg Television interview. ``It's a vote of confidence from regulators that they think Citigroup either has enough capital to survive or has the ability to raise more capital.
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Citigroup will absorb as much as $US42 billion of losses on Wachovia's $US312 billion in loans, the Federal Deposit Insurance Corp. said in a statement. The regulator will take on additional losses in exchange for $US12 billion in preferred stock and warrants.

Shares tumble

Citigroup fell $US2.40, or 12%, to $US17.75 at 4:15 p.m. in New York Stock Exchange composite trading, tumbling after the US House voted along party lines to reject a $US700 billion bank rescue plan. Citigroup shares have dropped 36% this year.

The deal, which may close by the end of the year, is expected to add to Citigroup's earnings in its first year and will be 10% accretive in the second year, Pandit said on a conference call with analysts and investors.

``This creates a dominant US franchise,'' Pandit said. ``This is one of those rare high-return acquisitions in which we have contained the risks. The economics are exceptional.''

Citigroup expects $US3.7 billion in pretax restructuring charges for severance costs in the next four years, the company said in a statement.

``Long-term, it's pretty good for Citi, which gets $US700 billion of assets for $US2 billion with backstop from the government and an opportunity to raise capital,'' said Michael Nix, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina.

$US600 billion deposits

The purchase will add about 3,300 branches and offices in 21 states, making Citigroup No. 3 behind Charlotte, North Carolina-based Bank of America and JPMorgan. Citigroup will have more than $US600 billion in deposits, or 9.8% of the US market. Citigroup's deposits globally will be $US1.3 trillion, about $US350 billion more than Bank of America.

``This augments Citigroup's deposit base and also its position in markets, particularly along the Eastern seaboard and somewhat more also in California, where it already has a position,'' Gary Townsend, chief executive officer of Hill- Townsend Capital LLC in Chevy Chase, Maryland, said in a Bloomberg TV interview.

Citigroup's ratings today were placed on CreditWatch by Standard & Poor's Ratings Service and Moody's Investors Service, raising the possibility of a cut by the two ratings companies.

S&P

``The acquisition is a positive for the franchise in building out Citigroup's thin presence it its home country,'' S&P said today in a statement. ``Integration risk and the distractions of dealing with a poor business environment, asset risks, and corporate restructuring could prove daunting.''

Pandit in May said Citigroup will shed $US400 billion in ``legacy assets,'' including real-estate holdings and collateralized debt obligations, such as bonds backed by pools of subprime mortgages. Citigroup at the time announced plans to cut $US15 billion in costs in the two to three years, while aiming for revenue growth of 9%, he said.

Citigroup Chief Financial Officer Gary Crittenden said he expects $US5.2 billion in writedowns in this quarter in addition to $US1 billion announced earlier. The bank cut 10,000 jobs in the period, bringing headcount reduction to 23,000 this year.

The purchase ``imposes integration challenges at a time when Citigroup's asset quality is being undermined by weakening consumer and commercial markets,'' Moody's said in a statement today.

Financial crisis

Wachovia is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and Washington Mutual Inc. into bankruptcy and led to the arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos. Wachovia will retain the A.G. Edwards Inc. brokerage and the Evergreen mutual-fund family.

Wachovia's stock, which fell last week at $US10 on the New York Stock Exchange, traded for 95 cents at 9 a.m. in early transactions. Trading was halted during regular hours. It sold for more than $US48 in February 2007.

Wachovia's slide toward collapse began when the bank paid more than $US24 billion in October 2006 for Golden West Financial Corp., the California lender that specialized in option-ARM home mortgages. The bank holds about $US122 billion of the adjustable- rate home loans.

Bloomberg News