Citigroup Shares Drop After Deal to Repay Taxpayers

Dec. 14 (Bloomberg) -- Citigroup Inc. fell the most in 2 ½ months in New York after the bank announced a deal with regulators to repay $20 billion to taxpayers by selling equity and debt.

Citigroup dropped 25 cents, or 6.3 percent, to $3.70 in composite trading on the New York Stock Exchange at 4 p.m., the biggest decline since Oct. 1. Volume of 822.8 million shares was almost three times the three-month average.

The bank, the only major U.S. lender still dependent on what the government calls “exceptional financial assistance,” said it will sell at least $20.5 billion of equity and debt to exit the Troubled Asset Relief Program. The U.S. Treasury Department also plans to sell as much as $5 billion of common stock it holds in the company, and will unload the rest of its stake during the next six to 12 months.

“They are taking on a significant amount of additional dilution in common shares outstanding in order to further exit TARP,” said Edward Najarian, an analyst at International Strategy and Investment Group in New York who rates Citigroup “hold.” “We think the stock will be under pressure today.”

The New York-based company also plans to substitute “substantial common stock” for cash compensation, Citigroup said in a statement today.

Chief Executive Officer Vikram Pandit has pressed for an exit from TARP out of concern that pay constraints imposed by the program make Citigroup vulnerable to employee poaching by Wall Street rivals. Bank of America Corp., the biggest U.S. bank, exited the program last week after paying back $45 billion of rescue funds.

‘Expensive’ Plan

“It’s important for Citi to exit these extraordinary agreements with the U.S. Treasury and the government as quickly as possible,” Gary Townsend, chief executive officer of Hill- Townsend Capital LLC, an investment firm in Chevy Chase, Maryland, said in a Bloomberg Television interview. “It’s expensive perhaps, but I think it had to be done.”

The bank will sell $17 billion of common stock, with a so- called over-allotment option of $2.55 billion, and $3.5 billion of “tangible equity units.”

An additional $1.7 billion of common stock equivalent will be issued next month to employees in lieu of cash they would have otherwise received as pay.

“So much is wrapped up into intellectual capital retention,” said Douglas Ciocca, a managing director at Renaissance Financial Corp. in Leawood, Kansas. “It’s such a big part of these banks at this point. They don’t want to be at a disadvantage as it relates to contract renegotiations coming into year-end.”

Loss Sharing

The TARP payments will result in a roughly $5.1 billion loss. Citigroup will also terminate its loss-sharing agreement with the government on $301 billion of its riskiest assets. Canceling about $1.8 billion of trust preferred securities linked to the program will result in a $1.3 billion loss, the company said.

Citigroup owes “taxpayers and the government a debt of gratitude for their extraordinary assistance,” Pandit said today in a memo to employees obtained by Bloomberg News. “These actions bring us closer to ending a very difficult period for our company.”

The U.S. earned a net profit of at least $13 billion from its investment in Citigroup, a Treasury official said today. The estimate includes about $3 billion in dividends and gains on the common-equity stake, roughly $5.8 billion based on the Dec. 11 share price.

Prince Alwaleed

Kingdom Holding Co. Chairman Prince Alwaleed bin Talal, once Citigroup’s largest individual shareholder, said after the announcement that he has no plans to sell shares in the bank.

In October, Pandit said he was “focused on repaying TARP as soon as possible” in cooperation with regulators. He pushed to accelerate the talks after Bank of America’s plan was announced, people familiar with the matter said last week.

Citigroup, which took $45 billion of TARP funds last year, converted about $25 billion in September into common stock, equivalent to a 34 percent stake.

The government is winding down the bailout programs it arranged as financial markets convulsed late last year. Treasury Secretary Timothy Geithner said in a Dec. 4 interview that most taxpayer money injected into banks through TARP will eventually be recovered.

JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid bailout funds in June. San Francisco-based Wells Fargo & Co., with $25 billion of TARP money, isn’t subject to pay limits because it never needed a second helping of bailout funds.

Companies still dependent on the Treasury’s exceptional assistance program include American International Group Inc. and General Motors Co.