Citgroup deal with Abu Dhabi group reassures investors
On a day when most financial services stocks jumped sharply and the broad market rallied, Citi's shares spent much of the day down before closing up 52 cents at $30.32.
According to investors and analysts, whatever extra bump the stock should have received from the cash infusion was outweighed by the questions raised by the deal, and the seeming lack of progress in Citigroup's ongoing search for a CEO to replace Charles Prince, who resigned earlier this month.
Kris Niswander, senior analyst at SNL Financial, said the terms of the deal were "expensive" for Citi, because the bank would have to pay out an annual 11 percent dividend rate to ADIA, much more than the 7 percent rate now received by regular investors. And ultimately, the bank will have to grant the Middle Eastern investment group as much as 235 million shares of Citi stock, which would dilute the value of equity help by existing shareholders.
"It's not necessarily desperation, but the deal shows signs that Citigroup needed to shore up its capital base," he says. "It's being done at a high price."
Citigroup stock has been in a near free fall for the past month, following disclosures that the meltdown in the subprime mortgage business could result in an $11 billion hit to the bank's earnings. Prince resigned under fire because of those losses. The bank is being run on a temporary basis by Citigroup Chairman Robert Rubin and acting CEO Win Bischoff until a new CEO is found.
Jack Ablin, chief investment officer at Harris Private Bank, says there's a "perception risk" at Citi right now. "They're going through this incredible turmoil without a CEO, which makes it seem like a rudderless ship," he says.
Jeffrey Sonnenfeld, a professor at the Yale School of Management, says the next CEO of Citibank shouldn't feel compelled to sell off the bank's various parts. He points out that Jamie Dimon, who once was an executive at Citi before he was ousted, is now thriving as the head of JPMorgan Chase.
"He's a reminder that individuals do make a difference, even at these global financial behemoths," Sonnenfeld says.
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