Citigroup to sell $7.5 billion stake to Abu Dhabi

By Dan Wilchins and James Cordahi

NEW YORK/DUBAI (Reuters) - Citigroup Inc (C.N) is selling up to 4.9 percent of itself for $7.5 billion to the Gulf Arab emirate of Abu Dhabi, giving the largest U.S. bank fresh capital as it wrestles with the subprime mortgage crisis and a search for a new chief executive.

The capital injection will shore up Citi's balance sheet, which has been hurt by some $6.8 billion of write-downs and losses in the third quarter, and the potential for another $11 billion in the fourth quarter.

Citi is paying a high price for the capital injection -- the mandatory convertibles it is selling to Abu Dhabi pay a fixed coupon of 11 percent. That is well above the average yield on U.S. junk bonds of 9.4 percent, according to Merrill Lynch data.

Abu Dhabi will be Citi's largest shareholder.

The sale to the $650 billion Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, may signal the free fall in U.S financial stocks is close to ending, analysts said.

"Citi is big, it's widely followed, and when people see confidence in it, it should mean something," said Bo Brownstein, an analyst covering financial stocks at Cambiar Investors in Denver, Colorado.

U.S. stocks rallied and the dollar rose against the yen. Citi shares were trading at $30.30 on the New York Stock Exchange late on Tuesday morning, up 1.7 percent. They had risen as much as 3.9 percent earlier in the session. Citi's bonds rose relative to Treasuries.

Shares of Citigroup have dropped more than 40 percent during the last five months, while the U.S. commercial banking sector as measured by the Philadelphia KBW Bank index .BKX has fallen about 20 percent.

Citi's market value has dropped by more than $100 billion this year, and on Monday its shares traded at their lowest level in more than five years.

CITI'S LARGEST SHAREHOLDER

Abu Dhabi's investment reflects the increasing financial might of oil-producing countries, which have benefited from a five-fold increase in the price of crude oil during the last six years.

Dubai International Capital, a private equity firm owned by the ruler of Dubai, said on Monday it made a "substantial investment" in Sony Corp (6758.T), while a separate Abu Dhabi entity earlier this month bought a $622 million stake in U.S.-based chip maker Advanced Micro Devices Inc (AMD.N).

Abu Dhabi Investment Authority manages the surplus revenues of the government of Abu Dhabi, the world's sixth-largest oil exporter. Standard Chartered estimated in September its assets were worth $650 billion. Both Dubai and Abu Dhabi are members of the United Arab Emirates federation.

State-run funds are keen for stakes in global banks, which can benefit from the development of emerging markets, a person familiar with the funds said.

The authority will have no special rights of ownership or control over Citi and no role in the management or governance of the bank, including no right to name board members.