Abu Dhabi Wants Out of Its Deal to Buy Citigroup Stock

abu-dhabi-wants-out-of-citigroup-stock-dealImagine agreeing to pay between $31.83 and $37.24 a share now for Citigroup (C). With the stock closing below $4 Tuesday, anyone would say "no deal" to such an offer today. But that's exactly the deal the Abu Dhabi Investment Authority struck in 2007 when it agreed to invest $7.5 billion in Citigroup. The ADIA pumped billions into Citigroup in exchange for an 11% dividend until March of next year. Then, over 18 months starting on March 15, those equity units get converted into common stock -- at those $30-plus price levels. Needless to say, while that dividend looked great to the ADIA at the time, the price to swap now makes it a really bad bargain.

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
As part of Citigroup's deal to exit the Troubled Asset Relief Program, the U.S. government plans to sell as much as $5 billion of its common stock soon and will unload the rest over the next six to 12 months. The government is expected to make at least a $13 billion profit on the deal. Citigroup also plans to issue $17 billion in common stock and $3.5 billion in "tangible equity units" to repay TARP funds.

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.

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