The No. 4 U.S. bank, striking a deal rumored over the past three weeks, will pay $3.42 billion for financial services company Westcorp, which owns 84 percent stake of independent auto-finance company WFS Financial as well as California's Western Financial Bank.
Wachovia will pay $490 million for the 16 percent public stake in WFS.
The deal offers premiums of 4.5 percent to Westcorp shareholders and 14 percent to WFS shareholders.
In early trading, WFS shares jumped nearly 9 percent to $70.65, while Westcorp shares edged up 0.83 percent to $61.86. Wachovia shares dipped 0.77 percent to $49.99.
Bank of America Corp. (BAC), the No. 3 U.S. bank, has also been expanding in the auto lending business, seeing opportunities in the fragmented industry.
The president of Wachovia's General Bank, Ben Jenkins, said the deal would more than double Wachovia's size in the business, making it the ninth largest U.S. auto loan originator, with offices in 47 states and access to new customers.
"This transaction also provides Wachovia with the opportunity to enter the California banking market in a modest way," Jenkins told a conference call.
He said California was a very attractive banking market. Western Financial Bank has 19 branches in Southern California with about $2.2 billion under deposit.
"It is not unreasonable to expect that at some point in time we will want to do some building," Jenkins said.
The deal came as no surprise, having been rumored over the past three weeks. In August, Westcorp said it was in talks on a possible business combination, driving its shares to a year high of $64.51.
Wachovia said the transaction was expected to add to earnings in the second year after completion and would lead to minor cost savings.
Bank of America's expansion in auto lending has included purchases of loans and leases.
In March, it agreed to buy KeyCorp's prime indirect automobile loan portfolio to expand its presence in the business in the Northwest and Midwest. And in July it said it was buying $55 billion of auto loans and leases from General Motors Acceptance Corp. (search) , the finance arm of General Motors Corp.
Wachovia's combined auto finance business will be based in Irvine, Calif., and will be run by WFS Chief Executive Thomas Wolfe, who will report to Carlos Evans, head of Wachovia's wholesale banking.
David Stevens, who runs Wachovia's dealer financial services unit, will become head of East Coast operations, and Bill Katafias, WFS's national production manager, will become head of West Coast operations. Both will report to Wolfe.
The deal is expected to close in the first quarter of 2006. Westcorp shareholders will receive 1.2749 Wachovia shares for each of their shares. WFS shareholders will receive 1.4661 Wachovia shares for each of their shares.
Based on Wachovia's closing share price of $50.38 on Friday, the deal values Westcorp shares at $64.23, a premium of 4.5 percent to their Friday closing price of $61.35. It values WFS shares at $73.86, a premium of 14 percent to their Friday closing price of $64.92.