Citigroup Inc. (C) has decided to exit its private student loan business. Its indirect subsidiary, Student Loan Corporation (STU) has signed definitive agreements with Discover Financial Services (DFS) and SLM Corporation or Sallie Mae (SLM) for divesting its business through a string of transactions. Citi has an 80% ownership in Student Loan Corp., and the rest is owned by public shareholders.
Deal Details
Discover would acquire Student Loan Corp. and its $4 billon of its private student loans, while Sallie Mae will acquire $28 billion of securitized federal student loans and related assets from Student Loan Corp. Citi itself would also acquire certain federal and private student loans and other assets totaling $8.7 billion from Student Loan Corp.
Additionally, $4.7 billion in Federal Family Education Loan Program (FFELP) loans would also be sold by Student Loan Corp. to the Department of Education. Shareholders of Student Loan Corp. would receive $30 per share following the deal closure.
The transaction is expected to close by year end 2010, subject to regulatory approvals, Sallie Mae shareholders’ approval, and other customary closing conditions. Citi is expected to report after-tax losses of approximately $500 million in the third quarter. The $8.7 billion assets of Citi acquired from Student Loan Corp. would also be reduced over time through strategic initiatives at Citi.
The Student Lending Market
The increasing role of the government is resulting in a significant transition in student lending business. As a result of the signing of the student loan reform act by President Obama in March, private sector companies are forbidden from originating new federal student loans after June 30, 2010. The government is now directly providing such loans instead of being a guarantor while private lenders continue to service the existing loans.
A Win-Win Situation
The deal is a strategic fit for Citi, Discover as well as for Sallie Mae. Citi segregated its assets as core and non-core last year; Citi Corp. represents the company’s core assets while Citi Holdings represents its non-core assets. The student lending business does not fit in the company’s core activities and was therefore made a part of Citi Holdings.
Citi aims to de-leverage Citi Holdings through a number of steps that include joint ventures, divestitures and asset run-offs, investing the money thus generated in the company’s core business. As a matter of fact, Citi has already announced the sale of a number of its businesses within Citi Holdings. Following these transactions, Citi Holdings will represent less than 20% of the company’s assets by year-end.
However, for Discover, this acquisition complements its existing network, adds a team with expertise in the student lending business and therefore helps in gaining share in the private student loan market. Discover has agreed to pay $600 million for this deal. The transaction is expected to be accretive to Discover’s earnings by approximately 9 cents per share in 2011.
For Sallie Mae, the deal would expand the company’s customer base to whom the company services the loans. It would add approximately 1.3 million new customers, following which the company would manage and service approximately $200 billion in federal student loans.
Our Take
Citi’s restructuring initiatives and its global footprint is encouraging. Nevertheless, the shrinking of its revenue base and the negative impact of the financial reform bill would not spare the company.
Citi is currently rated as Zacks #3 Rank (Hold), implying no clear directional pressure on the shares over the next one to three months. We also have a Neutral recommendation on the stock.
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