Citigroup Shareholders Beware

If you own stocks, undoubtedly you want management teams to feel an obligation to work for the shareholders. This boils down to striving to maximize shareholder value. Of course, attaining customer and employee satisfaction is important too, but succeeding on those fronts will usually aid in boosting a company’s public market value, so these factors go hand in hand.

If you own shares of Citigroup (Peridot does not) you might want to consider what CEO Chuck Prince said in response to a piece in Barron’s over the weekend about the possibility of breaking up the financial services giant. The weekly paper suggested that if Citigroup’s stock remains sluggish, there could be calls for the company to be broken up. The following is an excerpt from a Reuters story published Monday.

“In the article, however, Prince flatly rejected any discussion of splitting up the company into separate units. “Breaking up Citigroup is the dumbest idea I’ve ever heard of,” Barron’s quotes Prince as saying. “You would take a franchise that people have worked almost 200 years to build and break it up into two or three parts, only to see the parts acquired by others.”

Now why should Citigroup investors be upset with this? Within the financial services sector, only insurance companies garner P/E ratios lower than the big, diversified banking giants. Citigroup, along with JPMorgan Chase and Bank of America trade at only 10 or 11 times earnings. Many investors see this as cheap, but if the multiples don’t expand, share price appreciation will only come from earnings growth, which is hard to attain in any meaningful way since these firms are so huge.

The argument for breaking up a company like Citigroup is twofold; to achieve operational efficiencies, as well as a higher public market valuation. On the operations side, smaller firms are easier to manage and can move at a much faster pace in adapting to changing business environments. From the investor perspective, right now all of Citi’s business units are getting the meager 10 or 11 multiple. Breaking up into several pieces, the logic goes, will allow some units to get higher valuations, and thus the entire Citigroup enterprise would be more valuable.

I have seen specific break up estimates on Citigroup that value the parts at between $60 and $70 per share, versus the current price in the high 40’s. By splitting into 4 smaller companies (domestic retail banking, international retail banking, global asset management, and investment banking), Citigroup shareholders could make a hefty profit, perhaps 30% or more. Chuck Prince’s blatant dismissal of the idea doesn’t bode well for investors.

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8 Thoughts on “Citigroup Shareholders Beware

  1. Yaser Anwar on July 5, 2006 at 9:45 AM said:


    I agree with your argument about Citigroup breakup but not into 4 but more like two parts. The domestic and international retail alongside GAM & Ibanking. The banks do trade at 10 and 11 times earnings but they have good dividend yields which i don’t think would be possible when they break up.

    Ofcourse with the break up we would get growth but it would take years and extravagent costs to dismantle C into smaller pieces. I’d rather have the dividend yield expand & C sell off less profitable divisions, do what Eddie Lampart has been doing with Sears Holdings Corp.

    Yaser Anwar

  2. Mark Klein, M.D. on July 5, 2006 at 10:12 AM said:

    (my Deal Book posting today on the Citigroup story)

    As the owner of several thousand Citigroup shares, I agree with Chairman Prince and Prince Bin Talal.

    While breakup strategy is just what ossified relics like General Electric need to do to revive shareholder returns, consolidation is the future for the banking industry.

    Things would be a lot better for Citigroup with better management so we wouldn’t be regularly paying out billions to settle lawsuits the result of shady trading schemes. Better to raise salaries and end bonuses tied to “performance”. Creates too many incentives for corner cutting at the shareholders’ expense.

    Unhappy with your Citigroup shares? Many like me would be happy to see them dumped so we can buy more at depressed prices.

    While I patiently wait for Citigroup shares to revive, I just love those fat quarterly dividend checks! Chairman Price, want to silence the critics? Add a dime to the quarterly dividend!

  3. Chad Brand on July 5, 2006 at 10:14 AM said:

    I think you might get a little more bang for your buck with 4 entities. The domestic banking and investment banking units would likely still command a low multiple. Investors should be willing to pay up for the international business given it has a much more attractive growth outlook versus the U.S. retail operation. The reason for splitting GAM and IB, even though they obviously would do fine together, is that AM firms get higher multiples than IB, despite the correlation to overall market conditions. The T Rowe’s, Blackrock’s, and Legg’s of the world, etc.

    As for the dividend, investors should be indifferent as long as they keep all of the pieces after a break-up. If they are yielding 4%-plus now, they would have the same cash available to pay out even if they were separate. They would not each pay 1%, but all in all one would think Citi would make a point not to cut the dividend should a deal ever happen. Cendant made a similar announcement when they came out with their break-up plan.

    But at any rate, nothing will happen as long as Prince is running the show. Unfortunately, it’s rare for CEO’s to act as owners these days, because very few of them are owners in any meaningful way.

  4. 2outer on July 5, 2006 at 10:55 AM said:

    Citigroup sold its asset management business to Legg Mason – so anyone talking about one breaking up into an asset management group obviously does not know much about Citi.

  5. Chad Brand on July 5, 2006 at 11:08 AM said:

    Actually, Citigroup did an asset swap with Legg Mason. Legg got Citi’s mutual funds, and in return Citi got all of Legg’s brokers. Both companies wanted to focus on one of these businesses, not both. After the deal, Citigroup still has an investment bank (the former Salomon Brothers) and a global asset management business (Smith Barney). That’s where the Salomon Smith Barney name came from.

  6. Tanger on July 5, 2006 at 6:45 PM said:

    As the Citigroup model moves from the “one-stop shop” to more of a distributor model, it makes more and more sense for a break-up.

    In Wealth Management/Asset Management in particular, there is a push towards “open” architecture – and what better way is there to be open then to be an independent firm?

    That being said, I don’t know if Chuck Prince can necessarily devote the time to split up Citi in the near future. It took him several years to get the house back in order, and this year is important as far as earnings go – another down year or two, and I think you’re going to start seeing real pressure on him.

    Also, I suspect Jamie Dimon would provide a similar response to suggestions of breaking up JPMorgan Chase.

  7. J R Spread on July 12, 2006 at 1:39 PM said:

    Isn’t the low PE ratio, as seen with other banks, a reflection of the view that banks are at peak earnings after having seen IR fall to very low levels driving strong loan demand, reducing bad debts and inflating various asset classes to the benefit of the IB and AM divisions, (and mortgage banking in the case of house prices)?
    I actually think the earnings are more sustainable than the market and so see the multiple as too low.

    One of the benefits of diversification is that it gives stability to the earnings. In the dot-com bust Citigroup never saw their earnings go backwards. That should mean they can run with less capital.

  8. Chad Brand on July 12, 2006 at 2:04 PM said:

    I don’t know if the prevailing wisdom is that banks are at peak earnings. With an inverted yield curve, I highly doubt that is the case. Rather I think it is merely due to the fact that financials historically trade at a discount to the overall market. As the S&P 500’s P/E has contracted, so has that of Citigroup and the other large banks. Citi’s P/E has gone from 17 in 1999 to 11 today, but the market’s P/E has dropped by a similar percentage. There is no doubt that 11x is cheap, but if the market P/E goes from 16x to 12x, the banks could go from 11x to 8x. It is very true that the business is fairly predictable, which is why many investors like the risk/reward with C shares at 11x earnings with a 4% yield. It’s just tough to grow when you’re so big.

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