Annenberg Stake in Wells Puzzles Bears
TV Guide billionaire Walter H. Annenberg has joined pal Warren Buffett by taking a big stake in Wells Fargo & Co. even as fears mount that Wells faces crippling loan losses ahead.
The Annenberg connection, revealed Thursday in a Securities and Exchange Commission filing, adds a fascinating new angle to the ongoing Wells saga: While many Wall Street analysts believe that San Francisco-based Wells is inextricably tied to California’s sinking economy, first one and now another of the nation’s wealthiest investors have bet otherwise.
The 84-year-old Annenberg, who founded TV Guide and sold it to Rupert Murdoch for $3.2 billion in 1988, told the SEC that he has spent $196 million to buy 2.79 million Wells shares--5.3% of the total--for himself and various family trusts. Any investor in a public company must disclose his ownership to the SEC when it tops the 5% mark.
The filing doesn’t say when Annenberg began buying the stock, and his attorneys in Philadelphia declined comment. But only 288,500 of the shares have been purchased within the last 60 days, the SEC report says. So Annenberg may have been accumulating shares since sometime last year, or even before that.
Annenberg’s announcement follows word last week that Omaha-based Buffett has raised his stake in Wells to 5.6 million shares, or 10.8% of the total. Buffett, 62, also a billionaire and respected as one of the nation’s savviest investors, first disclosed that he had bought a large position in Wells in October, 1990.
Ever since, the debate over Wells has been one of the hottest on Wall Street: Is it a deeply troubled bank that has merely postponed the inevitable? Or do these billionaires know something that we don’t about the quality of the loans in Wells’ $41-billion portfolio?
The latest buying by Annenberg and Buffett is especially intriguing given that Wells is now undergoing a thorough loan review by federal bank regulators. Rumors have swirled in recent weeks that the government will force Wells this quarter to write off a huge sum of its California real estate loans as uncollectible, thus devastating earnings.
Wells stock has slumped from $86.375 earlier in the year to $69.125 as of Thursday, when it gained $1.25 on the Annenberg revelation.
To the analysts who are most bearish on Wells, the Annenberg announcement is extraordinarily suspicious. The bears, many of whom have “shorted” Wells stock--betting on a price collapse--have long worried that Wells management might be working specifically to confound them by encouraging rich allies to drive the stock higher.
Buffett and Annenberg are good friends. So news of Annenberg’s stake in Wells raises a big question for the shorts: What if there are more members of this Billionaire Boys’ Club lurking just below the 5% disclosure cutoff, waiting to bid up the stock should the bears try and push it down further?
Of course, this isn’t Monopoly money for Buffett and Annenberg, despite their riches. They didn’t get where they are by tossing millions of dollars around just to ruin short sellers. Both men obviously believe that Wells is a great investment.
Michael Lamb, whose Kansas City, Kan., company, Wealth Monitors Inc., tracks investments of the super-rich, says that when billionaires such as Buffett and Annenberg find something they believe in, “They don’t worry about the timing . . . they’re not into trading.”
A large one-time loan write-off by Wells would hardly concern those investors, Lamb says, so long as they believe that Wells will survive and prosper in the long run.
But that is exactly the bears’ point: They don’t believe that Wells will prosper. Their case is simple: Wells has far too much of its loan portfolio tied up in real estate loans--59% to be exact. Most major banks have spread their loans much more widely among real estate, business loans, foreign loans and other credits. Wells has focused on real estate, and to boot most of those loans are in California.
Already, Wells has set aside $1.83 billion in reserves for loan losses, or 4.55% of its total loans. But because California’s commercial real estate market is expected to weaken far more in coming months as the state economy continues to unravel, the bears believe that Wells’ ultimate loan write-offs will be dramatic.
Carole Berger, analyst at brokerage C. J. Lawrence Inc. in New York, puts it this way: “It defies everything I know about bank analysis to suggest that they could get through the worst real estate cycle in the postwar era reasonably unscathed, when they have one of the (banking) industry’s highest exposures to real estate.” Not surprisingly, she tells clients to sell the stock.
Wells’ fans, meanwhile, say the bears’ argument is growing tired after two years. The bulls on the stock don’t dispute that Wells will write off more loans. But the end result won’t be a knockout blow to the bank, they say--not when Wells has done such a good job of making top-dollar in the bulk of its businesses.
In fact, Wells’ net interest margin--the amount it earns on loans over what it pays on deposits--is one of the highest in the banking industry, at 5.69 percentage points in the second quarter. Wells has managed that by somehow holding on to customers’ deposits, even while slashing CD rates more than many competitors this year.
At the same time, Wells has sharply boosted fees this year on many of its consumer services, helping to bolster income even as more loans go bad.
In a sense, one can argue that Wells is forcing its consumer customers to help pay for the California real estate debacle. But that’s free enterprise--they can charge whatever the market will bear. If people don’t like it, they can go to another bank. So far, most haven’t.
Robert Albertson, analyst at Goldman, Sachs & Co. in New York, believes that Wells’ ability to earn big money even in the face of a slumping real estate market isn’t a trick.
It’s a sign of strong management, he argues, and that’s exactly what has attracted Buffett and Annenberg, he says.
Even if California’s real estate market eventually rivals the decline in Texas, Albertson says, Wells is already three-quarters through whatever loan problems it will incur. The bears just shake their heads at that notion. Just wait for the bank regulators’ quarterly review, they say.
For now, however, they’re battling with a couple of billionaire bulls who know a thing or two about making money.
How Wells Stacks Up
Wells Fargo enjoys a greater interest spread between its loans and its deposits than nearly all of its major rivals. But Wells’ detractors say that spread still won’t be enough to protect it from real estate loan losses: Wells has far more of its loans in real estate than any other big bank.
Real estate 2nd Qtr. loans as interest percentage Bank margin of total loans BancOne 6.53% 34% Wells Fargo 5.69% 59% Norwest 5.36% 38% First Interstate 5.06% 39% BankAmerica 4.56% 43% NationsBank 4.11% 32% Chase Manhattan 4.03% 33% Citicorp 3.71% 29% First Chicago 2.64% 22%
Source: Prudential Securities
