Grateful Citigroup Reveals Plans for Digging Itself Out of the Hole

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Last week, Citigroup Inc. (C) Chief Executive Vikram Pandit said the investment bank owed U.S. taxpayers a "large debt of gratitude" for providing $45 billion in assistance to the company at the height of the financial crisis, aid which prevented the bank from winding up on the scrap heap of financial history along with Lehman Brothers and Merrill Lynch. Two reports out Wednesday show how Pandit plans to bolster Citigroup's balance sheet after repaying the government for that financial lifeline.

Bloomberg News says that the New York-based bank will be selling as much as $2 billion of trust preferred securities, known as TruPS, as soon as today. Citigroup also will unload its real estate unit to private equity firm Apollo Management LP. In a separate article, Bloomberg notes that the deal will give Apollo, also based in New York, investments in 26 countries with a net asset value of $3.5 billion.

Neither move is surprising given Citigroup's financial predicament. On Tuesday, borrowers sold $13.9 billion worth of its corporate bonds. The company, which had been given up for dead by Wall Street, reported a fourth-quarter loss of $7.6 billion, or 33 cents per share. Analysts, though, took comfort in seeing that the report was no worse than they had feared. Shares of Citigroup have rebounded more than 263% over the past year as Pandit began dismantling the financial services empire built by his predecessor Sandy Weill. They are up today as well.

Analysts Foresee Return to Profitability Next Quarter


Pandit's job, which is less secure than that of a contestant on "American Idol," seems to be safe for now. In testimony last week before the Congressional Oversight Panel, Pandit took pride in the company's recent accomplishments,

"As a result of a successful public securities offering, in December 2009 we repaid $20 billion of the government's TARP investment in Citi in consultation with our regulators and the Department of the Treasury," he said. "The government has earned $3.0 billion in dividends and interest on its investment and asset-guarantee program for Citi .... American taxpayers still hold 27% of Citi's common stock, and we look forward to helping them realize value on that investment."

That last sentence is key. No CEO in his right mind wants to answer to members of Congress, a group that can be far more unpredictable than the most egomaniacal of private investors. Add to this the notion that long-term investors -- including Saudi Prince Alwaleed bin Talal, who recently reiterated his support for Pandit -- are still waiting to be made whole from the stock's death spiral, which sent it down to near $1 per share. Three years ago, Citigroup's shares traded for around $50; today, they trade for around $4. Wall Street analysts expect the current rising momentum to continue, with the company posting break-even results in the current quarter and turning profitable thereafter: Their median price target is $4.50 with a high target of $6.

Pandit is selling off 40% of Citigroup, and finding attractive valuations for those businesses will be more difficult because he is so clearly a motivated seller. Though today he is a Wall Street hero, he could easily turn into a zero if these sales fall through or if the economy falters significantly. Pandit shouldn't get too comfortable in his corner office.
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