Wells Fargo & Co.'s desire to repay bailout funds may be hindered by a $5 billion debt owed to Prudential Financial Inc. that could drain the banking company's cash or dilute current shareholders.

Wells Fargo, a recipient of $25 billion in aid, must pay Prudential for a 23% stake in the San Francisco company's securities brokerage unit. The stake could be bought for cash or stock around Jan. 1, according to a Prudential third-quarter filing, but most analysts said Wells would use shares.

Chief Executive Officer John Stumpf may seek to raise equity as he begins to exit the Troubled Asset Relief Program.

"If they are going to pay Prudential in stock, it might make sense to incorporate that as part of a larger offering to repay Tarp," said Joe Morford, an analyst at Royal Bank of Canada's RBC Capital Markets unit in San Francisco. "But would they grant Prudential $5 billion of stock that they could dump on the market the next day? That wouldn't be in Wells Fargo's best interest."

The dilemma stems from a deal struck in 2003 between Prudential and Wachovia Corp. to combine their retail brokerages into a joint venture. Prudential had the right to sell its stake to Wachovia, an obligation that passed to Wells Fargo when it bought Wachovia last year.

Wells has vowed to extract itself from Tarp in a "shareholder-friendly way," a task that may be complicated by the purchase of Prudential's stake. The U.S. is demanding that lenders raise equity (which dilutes shareholders) by selling stock before repaying Tarp.

Paying Prudential in shares would mean more dilution, and investors including Warren Buffett's Berkshire Hathaway Inc., Wells' largest shareholder, might face the prospect that Prudential would sell its stock in the banking company, depressing the price.

Wells spokeswoman Julia Tunis Bernard declined to comment.

A cash payment would reduce the bank's liquidity and put pressure on capital ratios at a time when regulators are concerned about the lender's ability to withstand future losses, said Todd Hagerman, an analyst in New York at Collins Stewart PLC.

"From a capital standpoint, issuing shares as opposed to another hit to your balance sheet makes a big difference," Hagerman said. "The shares could be issued out of the treasury."

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