So Abu Dhabi, which just bailed out Dubai with a $10 billion loan, is looking to escape the Citi deal, and is also suing the company for $4 billion in damages, alleging "fraudulent misrepresentations." The experts who talked with Bloomberg and The Wall Street Journal believe Abu Dhabi's chances of winning its court case are slim, but it may be able to use the suit as a lever to negotiate a more reasonable price at which to swap the stock. Paying over $30 for a share of stock that closed at $3.56 on Tuesday is clearly ridiculous. Still, even with the lawsuit, Abu Dhabi will likely take a loss on the deal.
The Citigroup equity units that ADIA purchased require the bank to remarket junior-ranking debt securities. The proceeds from the sale would then be used to buy Citigroup common stock in four equal installments between March 15, 2010, and Sept. 15, 2011. The equity units could be swapped for as many as 235.6 million shares.
Other sovereign wealth funds have fared much better with their Citigroup deals:
- The Kuwait Investment Authority sold its stake in Citigroup for $4.1 billion and made a $1.1 billion profit.
- Singapore Investment Corp. cut its stake in Citigroup to less than 5% from more than 9% and gained $1.6 billion
With all these shares changing hands, the downward pressure on Citigroup stock will likely continue well past March 15, 2010, the date upon which Abu Dhabi's stake begins to convert to common stock.
Bending the Tax Rules
In a related story, the Treasury Department and the IRS agreed to help Citigroup prop up its share price by foregoing billions of dollars in potential tax payments as part of its deal to wean the company from TARP, according to a story in The Washington Post. Last Friday, the IRS issued an exception to long-standing tax rules that will allow Citigroup and a few other companies partially owned by the government to retain billions of dollars worth of tax breaks that otherwise would have declined in value when the government sold its shares to private investors.
U.S. taxpayers could be taking a larger loss in tax revenue than Abu Dhabi is taking on its stock swap, depending on future profits of Citigroup. At the end of the third quarter, Citigroup said the value of its recent losses was $38 billion. The deal granted by the IRS will allow Citigroup to avoid paying taxes on its next $38 billion in profits. While no one can set a precise value on this deal because it depends on Citigroup's future profitability and other factors, experts believe Citi will save at least several billion dollars as a result of the IRS rule change.
Looks like both U.S. taxpayers and the sovereign investors of Abu Dhabi will be getting the short end of the stick as Citigroup rebuilds its balance sheet and moves slowly back toward profitability.