The battle for troubled US bank Wachovia has heated up with two rival suitors now competing for the firm.

Wells Fargo has announced it is set to buy Wachovia for $15.1bn (£8.5bn).

This scuppered an earlier US government-backed rescue deal in which Citigroup would buy Wachovia’s banking arm for $2.2bn.

Citigroup has now objected, saying the new agreement breached its exclusive acquisition rights and has demanded that it be called off.

Exclusive agreement

But a few days later it was courted by another suitor Wells Fargo.

“Wachovia’s agreement with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia” Citigroup statement

Wells offered to buy all of Wachovia for much more money, and so Wachovia walked away from its agreement with Citi.

This has clearly angered Citigroup, which said it had nearly completed its own deal with Wachovia.

This would have been overseen by the Federal Deposit Insurance Corporation (FDIC), and would have included government help.

“Wachovia’s agreement to a transaction with Wells Fargo is in clear breach of an exclusivity agreement between Citi and Wachovia,” Citigroup said in a statement.

The fight for Wachovia has come amid a crisis that has seen investment bank Lehman Brothers go bust, and the failure of giant mortgage lender Washington Mutual.

Financial difficulties

Cassandra Toroian, chief investment officer at Bell Rock Capital added: “For Citigroup, this is a real loss…this was a deal that was going to save them as much as it was saving Wachovia.”

“This deal enables us to keep Wachovia intact and preserve the value of an integrated company.” Robert Steel Wachovia chief executive

Wachovia’s financial difficulties stemmed from its 2006 purchase of mortgage lender Golden West for $25bn at the height of the then US housing boom, according to analysts.

Wachovia’s chief executive, Robert Steel, said: “Today’s announcement creates one of the strongest financial firms in the world.”

“This deal enables us to keep Wachovia intact and preserve the value of an integrated company,” he said.

Shareholder questions

Wells Fargo said it expected its earnings to benefit from the new agreement within a year, but some question the attraction of the deal for Wells’ shareholders.

Nancy Bush, analyst at Nab research said: “I think it’s a more elegant solution for Wachovia shareholders.”

But she added: “If I were a Wells Fargo shareholder…I wouldn’t be so happy. Wells is going to have to go to the capital markets at a time when it’s not so easy to raise capital.”

The deal still has to be approved by shareholders.

News reported by The BBC