UPDATE 3-Citi cuts assets by selling student loan business

* Citi to take $500 mln Q3 charge

* Discover will buy student loan platform, $4.2 bln loans

* Sallie Mae buying $28 bln of assets in deal

* Citi holding on to about $8.7 bln of assets

* Deal and another transaction cut Citi assets by $37 bln (Adds background on student loan business and why Citigroup is shedding it, detail on share price)

By Dan Wilchins

NEW YORK, Sept 17 (Reuters) - Citigroup Inc C.N, looking to reduce assets outside its main businesses, is selling Student Loan Corp STU.N to Discover Financial Services in a complicated deal that will result in the bank taking a $500 million charge this quarter.

Discover DFS.N is paying $600 million for the business, which is 80 percent owned by Citigroup. The credit card company said it expects the deal to add to its profit immediately after closing.

Just before the transaction closes, Student Loan Corp will sell $28 billion of federally guaranteed loans to Sallie Mae SLM.N and $8.7 billion of private student loans to Citigroup.

Sallie Mae is the largest student loan provider in the U.S., with market capitalization of $5.4 billion.

The transaction, combined with another sale of loans to the U.S government, will cut Citigroup’s assets by about $37 billion, the company said in a statement on Friday. The deals should slightly boost some measures of the bank’s capital, a spokeswoman said.

Citigroup is exiting the student loan business because it does not fit in neatly with the rest of the bank’s retail business, a person familiar with the matter said.

Student loans are typically arranged through universities and not in bank branches, so lending to students does not necessarily result in lifelong customers that rely on Citigroup for products like credit cards, savings accounts, and mortgages.

The business also has changed in recent years, with the U.S. government increasingly lending directly to students instead of using banks as intermediaries.

The healthcare law signed in March included a little-noticed provision that cut lenders out of the federal loan business.

Democratic legislators have been pushing to move in that direction for years, which is part of why Citigroup in 2009 put this business on its list of operations to sell, the source said.

With the low-risk federal loan business drying up, Student Loan Corp would have to instead focus on private loans, which has traditionally been a much smaller portion of its business.

Student Loan Corp’s shares rose 41 percent to $29.87. A $600 million purchase price for the 20 million shares implies a share price of $30. The deal depends on the approval of Student Loan Corp’s shareholders.

Citigroup’s shares fell 0.5 percent to $3.95, while Discover’s fell 1.4 percent to $15.57.


Breakingviews-Citi’s workout produces

more noticeable results [ID:nN17178177]



Discover will end up with $4.2 billion of private student loan and related assets, which it is buying at a discount to their face value. Discover’s purchase price may change after the deal closes if the value of the loans changes. The transaction is expected to close by the end of 2010.

Student Loan Corp is also selling $4.7 billion of federally guaranteed loans to the U.S. Department of Education in a separate transaction.

Citigroup has put loans and operations that are outside its main businesses into a unit known as Citi Holdings, which as of the end of the second quarter had about $465 billion, compared with $827 billion at its peak in the first quarter of 2008.

In June, Citigroup said it was selling $3.2 billion of auto loans to Banco Santander, SAN.MC and that it was selling about $2 billion of Canadian credit card loans to Canadian Imperial Bank of Commerce. CM.TO

Citigroup advised itself on the transaction. Barclays Capital was the lead financial advisor for Discover. Moelis & Co advised a special committee of independent Student Loan Corp directors. Goldman Sachs advised Sallie Mae. (Reporting by Dan Wilchins; Editing by Lisa Von Ahn, Gary Hill and Carol Bishopric)