By Mike Caggeso
Citigroup Inc. (C) will receive a $7.5 billion cash infusion from the Abu Dhabi Investment Authority, an investment arm of Abu Dhabi's government. The investment will enable the largest U.S. bank to keep paying its $2.16 a share dividend – a promise made by Chairman Robert Rubin – but at a price.
Citi will be paying an 11% interest rate on the convertible shares it issued to the ADIA – a "junk bond" rate that's nearly double the payout rate it offers its other bondholders,Bloomberg News reported.
Under the terms of the deal, ADIA will buy equity units that convert into Citigroup shares at strike prices ranging from $31.83 to $37.24 a share. Each equity unit will pay Abu Dhabi an 11% annual payment rate and will convert to Citigroup common shares from March 15, 2010 to Sept. 15, 2011.
ADIA ownership of shares won't breach 4.9% of the company's outstanding shares, and the company won't have voting rights in Citigroup management, such as designating board members.
All totaled, it's a win-win situation, as Citigroup was starving for both capital and some good headlines after subprime mortgage loses gutted the company's balance sheet and stock value [down almost 46% year-to-date]. Most recently, Citigroup announced that fourth-quarter profit would be reduced by as much as $7 billion, leading to the ouster of CEO Charles Prince III.
"This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," Win Bischoff, Citigroup's acting CEO, said in a statement. "This investment also enables us to access capital in an efficient manner."
Abu Dhabi is clearly rolling the dice on Citigroup, but it's also getting the company at a cheap price.
"Citi possesses a unique position in the financial markets throughout the world. We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth," Sheikh Ahmed Bin Zayed Al Nahayan, ADIA's managing director, said in a statement. "This investment reflects our confidence in Citi's potential to build shareholder value."
Abu Dhabi is taking a page from Prince Alwaleed bin Talal, nephew of King Abdullah of Saudi Arabia, who invested $590 million in Citicorp [Citigroup's former entity] in 1991 after the company took loses from major declines in U.S. property prices and even worse loan losses in Latin America. Alwaleed's investment is now valued at $6 billion in Citigroup's shares. [To read our special investment research report about Prince Alwaleed, and other top global investors to watch and profit from, please click here. The report is free of charge.]
Abu Dhabi is one of the seven emirates that make up the United Arab Emirates. It, along with its neighbors Qatar and Dubai, in many markets around the world, increasing their foothold as financial epicenter of the Middle East and diversifying their revenues beyond their vast oil reserves.
News and Related Story Links:
- Citigroup News Release:
Citi to Sell $7.5 Billion of Equity Units to the Abu Dhabi Investment Authority
- Money Morning:
India Government Rejects Citigroup Bid to Up Stake in NSE
- Money Morning:
Citigroup's Troubles Continue to Grow
- Bloomberg News:
Citigroup Pays to Keep Dividend After Mortgage Losses Mount.
- Money Morning Investment Research Report:
The Three Simple Secrets to Global Investing Profits.
- Money Morning:
Dubai Ports World's Record IPO