The Abu Dhabi Investment Authority (ADIA) will invest $7.5 billion to buy up to 4.9% of US bank Citi.
Citi will issue equity units which are convertible into common shares on a private placement basis to the Abu Dhabi Investment Authority. Each equity unit will convert into a Citi share at prices ranging from $31.83 to $37.24 per share on four dates between 2010 and 2011 and will pay a fixed annual payment rate of 11%, payable quarterly.
ADIA has agreed to limit its ownership to a 4.9% stake in the bank. Citi further clarified that the Middle Eastern fund gains no special rights of ownership or control, no role in management or governance, including, significantly, no right to nominate a director to the board.
ôThe payment rate reflects market terms based on the conversion premium as well as Citi's current dividend yield,ö says Citi in a written statement. ôSubstantially all of the investment proceeds will be treated as tier-1 capital for regulatory capital purposes.ö Analysts are less impressed with the 11% coupon, but agree that it is the price that the US bank has to pay to induct ADIA.
ADIA is the sovereign wealth fund of the government of Abu Dhabi, one of the seven emirates forming the United Arab Emirates.
Win Bischoff, Citi's acting chief executive officer, termed the ADIA investment one of a series of steps the US bank has taken to strengthen its capital base including ôsales of certain non-strategic assets, the issuance of trust preferred securities, and the previously announced plan to use common stock to purchase 32% of Nikko Cordial in Japanö. He also highlighted that the ADIA investment is consistent with CitiÆs strategy to tap ôdiverse sources of funding in terms of both geography and type of security".
Some market commentators say the deal is a bailout of the US bank. Citi announced on November 4 that it would take a write-down of $8-$11 billion on its $55 billion US subprime-related direct exposure. The same day CEO Charles (Chuck) Prince resigned as he took responsibility for the losses.
The quantum of the loss came as a surprise to the market which believed that Citi had fully disclosed its exposure in the previous quarter. Indeed, Saudi Prince Alwaleed bin Talal bin Abdul Aziz al Saud, who owns 3.6% of the bank, gave an interview to Fortune magazine after Citi announced its results. The Saudi prince said he was ôextremely disappointedö that Chuck Prince had not given him any guidance to expect the quantum of Q4 losses.
Analysts calculated after the November 4 disclosure that, as at September 30, Citi would have a capital adequacy ratio of 7.3%, above the regulatory requirement of 6%, but below CitiÆs own 7.5% internal target.
Middle East investors have a history of buying large stakes in banks and financial institutions, and recently they have stepped up the pace. Dubai International Capital has stakes in both HSBC and Standard Chartered and recently agreed to buy a $1.26 billion stake in Och-Ziff Capital Management, a hedge fund. DIFC Investments, an arm of the Dubai International Financial Centre, in May bought a 2.2% stake in Deutsche Bank to become the fifth largest shareholder in the German bank. Analysts calculated DIFC would have paid around $1.8 billion at traded prices for the stake.
The Citi transaction - and indeed all the deals announced thus far by Middle East investors - differ from the recent deals China Inc has struck in terms of board representation. With its Ç2.2 ($3.26) billion payment for a 3.1% stake in Barclays, China Development Bank negotiated the right to nominate a director to the Barclays' board. In October, Citic Securities announced a deal to invest $1 billion in Bear Stearns which converts to about 6% of Bear Stearns' outstanding shares. Citic is expected to have board representation on the Bear Stearns' board. But the Citic deal is not strictly comparable as it involves a reciprocal arrangement whereby Bear Stearns is investing a similar amount in Citic, with similar rights.
Citi shares closed at $30.70 on Monday, after the ADIA investment was announced, recovering to lose only 3% after hitting a five-year low earlier in the day.
Prince Alwaleed also told Fortune that the bank was under-valued at the price at which it was trading and that he would not be selling shares as he believes it ôis a very strong company with a good futureö. The Saudi prince invested around $600 million in Citi in the late-90s in a bailout deal which is being compared by many observers to the current ADIA deal.
ôThe average [price at which] I bought Citibank was $2.75 per share adjusted for stock splits,ö said the Prince in the interview. He has certainly reaped dividends on his investment - even at the depressed prices at which the stock currently trades - and ADIA must be hoping to replicate his success.