NEW YORK/WASHINGTON (Reuters) - The U.S. Treasury delayed a plan to sell its $5 billion of Citigroup Inc shares after a stock offering by the bank attracted weak demand and priced at a much lower-than-expected $3.15 a share.
The bank sold $20 billion of stock and convertible bonds to repay funds it owes to the government so it can avoid the executive compensation restrictions that came with multiple U.S. bailouts.
But raising that capital came at a steep cost to shareholders, whose shares are worth 20 percent less than their closing level on Friday, before the bank announced its plan for repaying funds to the government.
“It’s a terrific deal for Citigroup’s managers, who can get paid more, and a terrible deal for shareholders. The company paid a huge price for this capital,” said Sean Egan, principal at ratings agency Egan-Jones Ratings.
Citigroup was the third major U.S. bank to launch a multibillion-dollar share sale in December and the multitude of share sales likely dampened demand, analysts said.
“Buyers are in control of the process now,” said Blake Howells, director of research at Becker Capital Management in Portland, Oregon.
The share sale price is less than the $3.25 price at which the government bought them earlier this year as part of an emergency rescue of the No. 3 U.S. bank, shrinking the paper value of the government’s 7.7 billion shares to $24.2 billion. That stake was originally worth $25 billion and in October was worth nearly $40 billion.
Treasury “is not going to sell at a loss. That’s the bottom line,” a source familiar with the situation said.
The U.S. decided not to sell any shares at this time, and has agreed not to sell Citi shares for 90 days, the bank and the Treasury said. The government owns about one-third of Citigroup’s shares.
The U.S. government still plans to sell its Citigroup shares within the next year, a Treasury spokesman said.
The government’s decision not to sell shares was an about-face from Monday, when Citigroup said the government would sell up to $5 billion of shares alongside the bank’s offering.
Given Bank of America Corp’s $19.3 billion share sale at the beginning of the month, and Wells Fargo & Co’s $12.25 billion share sale this week, several analysts questioned the wisdom of Citigroup’s completing its massive sale in December.
The bank has only generated profits this year from moves like selling stakes in major businesses and harvesting tax benefits.
Investors may have been more receptive to Citigroup’s share sale after it posted a few quarters of profits from its main banking businesses, analysts said.
Even with Citigroup’s efforts to repay the government this year, Pay Czar Kenneth Feinberg will still have say over 2009 compensation, meaning there may be little advantage to completing a deal this year.
“There’s no question that Citigroup should have waited,” Egan said.
A person familiar with the bank’s thinking said that a deal would have been difficult whenever Citigroup did it because the bank needed to raise a large amount of capital relative to its market value and daily trading volume.
Citigroup had been negotiating with regulators for months, and when it finally reached a deal with them, it did not make sense to wait, the person added.
Citigroup said in a statement that its sale of shares and convertible securities was the largest in U.S. capital markets history.
The bank, which has recorded more than $120 billion of writedowns and credit losses since the credit crunch began, received $25 billion of bailout money from the government’s Troubled Asset Relief Program in October, and another $20 billion in December.
Earlier this year, the U.S. agreed to convert $25 billion of the preferred shares it bought from Citigroup into common stock. The government also converted $20 billion of Citi preferred stock into trust preferred securities, which the bank plans to repay with the proceeds of Wednesday’s offerings.
Citigroup also is ending an agreement with the government that guaranteed a roughly $250 billion portfolio of assets against excessive losses.
The bank sold $17 billion of common shares and another $3.5 billion of bonds that automatically convert into shares in three years.
The bank sold convertible notes that pay a coupon of 7.5 percent a year, and automatically convert to shares at a 25 percent premium to the pricing level in three years.
The bank said on Monday it also plans to issue $1.7 billion of shares to employees, and may sell another $3 billion of trust preferred securities in the first quarter.
Citi’s stock closed at $3.45 on Wednesday before the offering was priced.
Additional reporting by Elinor Comlay; editing by Andre Grenon, Steve Orlofsky and Carol Bishopric