Citi's Not-So-Good Stock Sale

By Daniel Indiviglio

Citi finally priced its equity deal to exit the bailout. The stock offering is reported to have not gone particularly well. For several reasons, a share of Citi's equity didn't achieve quite as high a price as the bank had hoped it would. Yet, the firm is still hailing the stock sale as a success, since it managed to raise $20.5 billion. Well, sure, it could be been worse -- the sale could have failed entirely to obtain the capital anticipated. But that doesn't mean it was good.

So why did Citi's offering do so badly? For a couple reasons. One obvious one is that lots of investors are still scared of Citi. Many of the same toxic assets that plagued the firm before the crisis remain on its balance sheet.

But possibly the bigger reason is just market oversaturation with bank stock. Since a number of large banks have been exiting the TARP recently by selling equity, investors have been flooded with bank stock. There's only so much equity from the financial sector that investors have an appetite for. They want their portfolios to remain reasonably diverse, and if they buy too much bank stock, then they might have a larger exposure to banking than they'd like.

As a result, Citi had some trouble. It initially hoped to sell the shares for more than the $3.15 it was forced to settle for. Earlier this month, the stock price exceeded $4. As I write this, it's trading for around $3.20, down more than 20% lower than that level, and 7% down on the day. At $3.15, that also amounts to around 6.5 billion more shares outstanding. If they sold for $4, the same amount of capital could have been raised by issuing around 1.4 billion fewer shares.

Here's a good chart via Bloomberg that shows just how much dilution Citi's stock has suffered from over the past six months:

citi share price bloomb 2009.PNG

I find this chart kind of incredible. It might be why Citi is relatively content with its equity offering. Citi's stock price today isn't far off its price in mid-June, when only a touch over 5 billion shares were outstanding. Now the number outstanding is approaching 30 billion, but the stock is selling for the same price. That means the firm's value has increased by a similar multiple as its shares over this period.

Of course, that also means all shareholders who owned Citi's stock back in June, and haven't purchased more, own a far smaller slice of the firm now. And that includes taxpayers. The Treasury's share went from 34% prior to this week's offering to 27% after.

Given the significant decline in Citi's stock price this week, it's not surprising that the Treasury has decided to wait to sell its shares. Now, it says it could hold onto its stake for up to a year.

This article available online at:

http://www.theatlantic.com/business/archive/2009/12/citis-not-so-good-stock-sale/32241/