The U.S. Treasury is continuing with its efforts to shed its holdings in Citigroup Inc. (C). It has reaped in $41.6 billion as proceeds from the sale of Citi common stock, trust preferred securities (TRUPS), and Citi’s repayment of the bailout money, dividends and other distributions received for bailing out the company. Treasury had provided Citi a total fund of $45 billion under Troubled Asset Relief Program (TARP) and a loss-sharing agreement for Citi’s potential losses on $301 billion of its assets which was later terminated by Citi.
The Treasury still has its holdings in Citi, which when valued at Thursday’s closing price, should help it bring in another $14.0 billion for the taxpayers. Additionally, proceeds would also be generated by the warrants sale of Citi’s common stock under TARP and from the sale of up to $800 million in TRUPS currently held by Federal Deposit Insurance Corporation (FDIC).
The Sale
Yesterday, the Treasury announced that it has priced a secondary offering of all Citi TRUPS and estimates to receive on a gross basis an amount of $2.246 billion. As the Treasury neither had to nor has any further obligations to pay under the arrangement, the proceeds will represent a net gain for the taxpayer fund.
Moreover, the Treasury concluded the sale of 1.5 billion shares of Citi under its third trading plan. In the first trading plan, the Treasury also sold 1.5 billion shares in Citi for gross proceeds of around $6.2 billion. The trading plan was announced in April 2010 and was closed in May. In its second phase, the Treasury sold 1.1 billion shares of Citi. The sale closed in July. The Treasury has so far sold around 4.1 billion shares for gross proceeds of about $16.4 billion. It currently owns around 3.6 billion shares or 12.4% of Citi’s outstanding common stock. It intends to continue selling its Citi stake following the completion of the Citi’s blackout period in connection to the third quarter earnings release.
BofA Merrill Lynch of Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), UBS Investment Bank of UBS AG (UBS) and Wells Fargo Securities of Wells Fargo & Co. (WFC) acted as joint lead managers and Citigroup Global Markets Inc. as global coordinator but not as an underwriter or sales agent for the TRUPS offering. For the Citi common stock sale under the trading plan, Morgan Stanley acted as the sales agent.
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 a gradual recovery with the stabilization of large financial institutions, tumbling home prices, soaring home foreclosures and a high unemployment rate continue to prevail. However, the Treasury has received decent returns on many of their financial-sector investments.
On the other hand, the shedding of its stake by the Treasury is a positive for Citi as it reduces the government overhang on the stock. Still we think the pace of selling the stake is slow as the Treasury had originally intended to sell the stake by this year. Nevertheless, Citi’s core business is progressing well and the international business is gaining momentum, though the earnings in the coming quarters is expected to remain pressured following the recent reform Act and the shrinking of its revenue base due to the Citi Holdings business reduction.
Citi is currently rated as Zacks #3 Rank (Hold), implying no clear directional pressure on the stock over the next one to three months. The stock is also rated Neutral in the long term.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
Zacks Investment Research
