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Are Citi's Options Narrowing?
Once considered 'too big to fail,' Citi may find itself having to sell.
November 21, 2008
Despite Citigroup's assurances this week that the New York company has a strong capital base and a vote of confidence Thursday from a major stakeholder, observers say the company may be running out of options.
One of the starkest signs of how quickly perception on Citi has changed is that just days ago, as it announced a new round of layoffs, observers still viewed the acquisition of a large US depositary institution as a likely next step. However, in a fast-paced and panicked market environment the company's shares have been severely punished in recent days, reducing its market cap; cutting into its deal currency; and planting the idea, once unimaginable, that a sale of the company could be on the table.
With no clear road map for how it plans to reinvent itself after four straight quarterly losses, market observers saw little prospect of a rebound soon.
"There is nothing in their arsenal right now to restore investor confidence," Joseph Battipaglia, the chief investment officer at Stifel Financial Corp.'s Ryan Beck & Co., said Thursday.
Gary B. Townsend, the chief executive of Hill-Townsend Capital, cited market rumors Thursday that Citi might sell all or part of itself to Goldman Sachs or potentially another bank holding company perceived to have strong management, such as US Bancorp in Minneapolis.
"Aside from a sale, Citi needs more common equity, but it [is] very hard to raise capital with a stock trading around four or five bucks," Townsend said. "So do you split it up or merge it into another company? That's much more of a possibility than it was in the very recent past."
Steven Brown, the chairman of Banc Investment Group in San Francisco, said Thursday: "From where I sit, I still think there is some good value in Citi, but right now fear is feeding on fear. And against that fear, I assume all options are on the table, including a sale."
US Bancorp on Wednesday leapfrogged Citi to become the nation's fourth-largest banking company by market value, despite having only about one-eighth the assets of the $2.1 trillion-asset Citi.
US Bancorp and Goldman declined to comment. Citi did not respond to calls Thursday.
Battipaglia has a grimmer outlook for the company. "The only possible investor in the game right now is the government, and that doesn't speak well to Citi's options."
Citi CEO Vikram Pandit, in a presentation to employees Monday, said the company was working in haste to bolster efficiency and return to profitability through job cuts, divestitures, and reorganization. And in a show of confidence, he and five other top Citi executives bought $17 million of the company's shares last week, according to regulatory filings.
On Thursday, Saudi Arabia's Prince Alwaleed bin Talal, Citi's biggest individual shareholder, said he plans to increase his stake in the company by more than one-fifth, to 5%. He said Citi's shares are undervalued and also noted that he fully supports Pandit.
Critics, however, said that Pandit has been stingy with details, declining to specify where job cuts and divestitures would be focused. Some observers said Citi has the wherewithal to survive the downturn, if only because of its sheer size and the government's thinly veiled signal that it views Citi as too big to fail.
Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners, said in an interview Thursday that, after the Treasury Department chose Citi to be among the first large banks to participate in its capital purchase program, "it essentially anointed Citi as among the banks that must survive." However, given the dire lack of investor confidence, Citi may need a second government injection to stay afloat in 2009, he said. And he and other analysts noted that many thought Wachovia too big to fail until anxious investors pummeled its shares and forced it into the arms of Wells Fargo to avoid failure last month.
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