Government Loosens Grip on Citi - Analyst Blog

The fifth and final sale of the remaining 2.4 billion shares of Citigroup Inc. (C) announced by the U.S. Treasury yesterday will exhaust government's stake in the company. The Citi shares were acquired by the government a couple of years back as a part of the company's participation in the Troubled Asset Relief Program (TARP).

The Treasury expects to receive net proceeds of $10.68 on the basis of the proposed offering price of $4.45 per share for a total of 2.4 billion shares. The government had acquired 27% ownership in Citigroup upon its conversion of $25 billion of rescue money into the latter's common stock in 2009.

Citi, which had a huge exposure to troubled mortgages in the form of collateralized debt obligation (CDO), received a total of $45 billion in bailout funds in 2008. There was also a loss-sharing agreement with the Treasury for Citi's potential losses on $301 billion of its assets, later terminated by the company. However, it had repaid $20 billion of it debt to the Treasury in the following year.

The Treasury has been selling off its stake in tranches since April 2010.  In the first phase, the Treasury sold 1.5 billion shares in Citi for gross proceeds of around $6.2 billion in May. In its second phase, the Treasury sold 1.1 billion shares in July, the third phase witnessed sell out of another 1.5 billion shares in September. Altogether these transactions provided the Treasury with gross proceeds of $16.4 billion. The Treasury's fourth pre-arranged written trading plan sold 1.5 billion additional shares from October to November.

The role of sales agent for the above stock sale is being performed by Morgan Stanley (MS).

The bailout of New York based Citi is expected to turn out profitable for taxpayers with 89 cents of profit per share on a total of 7.7 billion shares emanating from average selling price of $4.14 and a lower average conversion price of $3.25. Apart from this, the government also realized a net gain of $2.246 billion in the offering of all Citi TRUPS in September. The Government also pocketed $3 billion of dividends on its preferred shares.

Though, Treasury will do away with its holding in Citi's common stock upon the conclusion of this transaction, it will still own the right to exercise warrants on 465.1 million Citigroup shares. Moreover, the Federal Deposit Insurance Corp. holds $800 million of the bank's trust-preferred securities on behalf of the Treasury.

Our Take

The bailout program has received criticisms from the average taxpayer on grounds of helping those companies whose actions have in turn resulted in the economic crisis. Although the economy is now showing signs of gradual recovery with the stabilization of large financial institutions, tumbling home prices and a high unemployment rate continue to prevail. However, the Treasury has received decent returns on many of their financial-sector investments. According to Bloomberg, it has earned a 14% return on the $10 billion invested in Goldman Sachs Group Inc., (GS), and 13% on the same amount to money lent to Morgan Stanley (MS).  Bloomberg also estimated that the government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, indicating an 8.2% return over two years.

The shedding of its stake by the Treasury is a positive for Citi as it reduces the government overhang on the stock. Also, the pace of selling the stake is in sync with the original intention to complete sell off by the end of this year. 

Citi's core business is progressing well and the international business is gaining momentum, though the earnings in the coming quarters are expected to remain pressured following the recent reform Act and the shrinking of its revenue base due to the Citi Holdings business reduction.

Citi currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the company's business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.

 
CITIGROUP INC (C): Free Stock Analysis Report
 
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