The battle for battered bank Wachovia Corp. (WB) is heating up with Citigroup Inc.’s (C) win of a court order to extend negotiations, while Wells Fargo & Co. (WFC) contends its merger agreement still stands.

Late Saturday evening, Citi won a court order from New York State Supreme Court Justice Charles Ramos granting an injunction to extend the exclusive negotiation period between Citigroup and Wachovia.

The original agreement between Citi and Wachovia, reached with assistance and backing from the Federal Deposit Insurance Corp. (FDIC) did not include a signed merger agreement. However, it did grant Citi exclusive rights to negotiate with Wachovia through today (Monday).

Wells Fargo’s agreement with Wachovia was announced on Friday, well before the exclusive negotiation clause’s deadline. Despite this breach and the finding by the court, Wells Fargo remains confident in its agreement.

“Wells Fargo and Wachovia have a firm, binding merger agreement,” Wells Fargo announced in a statement released yesterday (Sunday).

“We are confident that we will complete our announced merger with Wachovia. Nothing in the court’s temporary order impacts our ability to ultimately do that,” the statement read.

Wells Fargo’s $15 billion, or $7 a share, for all Wachovia operations easily trumps Citigroup’s $2.16 billion, or $1 per share, offer for just Wachovia’s deposits, loan portfolio, and retail banking branches. The Citigroup offer did not include Wachovia’s A.G. Edwards brokerage unit or Evergreen Investment Management Co. LLC mutual fund family.

Wells Fargo also has the advantage of not relying on any government assistance to complete its proposed merger with Wachovia.

But Wachovia did breach its original agreement with Citigroup.

“Any such agreement between Wachovia and Wells Fargo is illegal,” Vikram Pandi, chief executive officer of Citigroup, said after the Wells Fargo announcement on Friday.

However, given the two banks signed a non-binding term sheet, rather than a formal binding merger agreement, Citigroup might have little recourse unless it chooses to up its own bid for Wachovia.

“I’m still not convinced that Citigroup can force this sale to happen,” Elizabeth Nowicki, a professor at Tulane University Law School in New Orleans and a former M&A lawyer at Sullivan & Cromwell, told Bloomberg News. “Citigroup may be facing the chance to get themselves a small settlement, and that’s a nice shot in the arm for a company that’s struggling.”

Source: Wells Fargo and Citigroup Continue to Battle for Wachovia