It looks like Citigroup (C) won't be rid of government ownership as quickly as it hoped. The Treasury Department has postponed its planned sale of up to $5 billion in Citi stock after Wall Street gave the plan a cool reception. Investors were willing to pay only $3.15 per share, 10 cents less than the government paid for the stock.
Instead of a relatively quick sale of its 34% share of Citi over the next six to 12 months, the Treasury now plans to hold off on selling Citi shares for 90 days, and then gradually sell off its holdings over the next year.
%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Investors clearly were skeptical of Citi's earnings prospects. With so many other banks looking to escape TARP, they found what they thought were better prospects for their money.
In the end, investors told Citi that they would only buy the new shares if the government holds off on dumping its shares. You can't blame them, as other government sovereign funds also dumping their Citi shares. The Kuwait Authority sold its stake in Citi for $4.1 billion and Singapore sold about half of its stake in Citigroup; it now owns less than 5% of bank, about half of the 9% it held earlier. Kuwait made a $1.1 billion profit and Singapore gained $1.6 billion. The Abu Dhabi Investment Authority also wants to shed its $7.5 billion stake and is trying to get out of its 2007 deal.
With all these governments looking to sell their holdings in Citi, the stock has drifted downward from its highest recent closing of $5 in August to just $3.45 yesterday. Since the newly issued stock sold at a discounted price of $3.15, you can expect the price of shares to continue to go down today. The pre-market price at 8 AM was $3.17. But investors may welcome the decision by the U.S. government not to sell its stake for at least 12 months and halt the fall in share value.
After the government postponed its share sale, Citi managed to sell $17 billion of newly issued shares. Citi will use the funds, plus capital raised on other securities, to repay its $20 billion in bailout money. It also will unwind a deal in which the government is shielding Citi from most losses on $301 billion of assets. The bank will now have to prove to investors that it can stand on its own two feet and make a profit.
CEO Vikram Pandit wanted to repay the bailout funds as quickly as possible because he thought the compensation and other government restrictions were hurting Citigroup's ability to lure employees and get deals with clients. Now that the government will stall its sale of Citi stock, Pandit may have rushed into this payoff without much to show for it. Since the government will still own 34% of Citi for at least another year, how free will Citi be?
Small Cap Investing
Learn now to invest in small companies the right way.View Course »