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 the resignation of its chief executive.

The capital injection will shore up Citi's balance sheet, which has been hurt by some $6.8 billion of writedowns 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 by selling mandatory convertible securities to Abu Dhabi which pay a fixed coupon of 11 percent. That is above the average yield on U.S. junk bonds, which is 9.4 percent according to Merrill Lynch data.

Analysts at Royal Bank of Scotland said in a note that Citigroup was paying a "high price", but that the convertible notes would help boost the bank's core capital.

The sale to the $650 billion Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, may also signal the freefall 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.

The dollar rose against the yen on the news, and Japanese bank stocks also rallied. In Tokyo trading, Citi shares (8710.T) fell 4.2 percent for the day, but had been trading even lower before news of the Abu Dhabi deal.

Family-ruled Abu Dhabi -- whose citizens number no more than 400,000 -- will be Citi's largest shareholder. The 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.

Gulf investors have announced more than $70 billion of foreign acquisitions this year, more than in the previous two years combined.

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)

Gulf investors such as the state-owned Investment Corporation of Dubai have expressed interest in taking advantage of plummeting U.S. financial stock prices to buy.

Shares of Citigroup have plunged 42.5 percent during the last five months. Merrill Lynch & Co MER.N, which wrote down $8.4 billion of assets in the third quarter, is down 40.6 percent during the same period.

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.

Sir Win Bischoff, Citi's interim chief executive said in a statement on Monday: "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."

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.