Al-Waleed to the Citi’s Rescue Again?

The Wall Street Journal reports that Prince Al-Waleed, who salvaged Citi in the early 1990s (its stock was at $9 on its way to zero) is expected to pump equity into the bank again. Note there are some disparities between the Journal’s story and the one in the Financial Times. For example, the Journal says the Saudi investor will likely have company in providing $8 to $10 billion to the troubled bank, while the FT says the fundraising target is $14 billion, is more specific as to who may be in the deal, and does not mention Al-Waleed as a prospective investor.

We’ll see soon enough who had this one right. First, from the Journal:

Prince Alwaleed bin Talal is poised to once again come to the rescue of Citigroup Inc.

This time, the Saudi billionaire is expected to be joined by other investors, including the China Development Bank, people familiar with the matter said.

While it isn’t clear how much Prince Alwaleed will invest, the Chinese entity is expected to invest roughly $2 billion, one person said. Prince Alwaleed’s total stake in Citigroup is likely to remain below 5% in order to avoid regulatory scrutiny. However, given that Citi has a stock-market value of $140 billion, even a 1% stake would end up being a significant sum of money.

While Citigroup is still working out details of the planned investments, and there’s a chance they could fall apart, the bank is hoping to collect a total of $8 billion to $10 billion from a number of investors, likely including at least one fund affiliated with a foreign government, the people said…..

This would be at least the third major investment by a Chinese institution in a struggling Wall Street firm. China Investment Corp. is investing $5 billion in Morgan Stanley, while Citic Securities Co. agreed to a $1 billion investment in Bear Stearns Cos., though Bear will also invest that amount in the Chinese firm, albeit over many years.

Citi is also talking to other existing shareholders, including U.S. investment funds, to potentially up their stake in the bank.

A cash infusion would leave Prince Alwaleed in a familiar role. In 1991, he pumped $590 million into what was then known as Citicorp. The investment, which was in the form of a private placement of convertible preferred stock, gave him an ownership stake of nearly 15% at the time. For years, he was Citi’s largest individual shareholder.

Prince Alwaleed ceded that title last month, when Abu Dhabi’s investment arm paid $7.5 billion for a 4.9% stake in the cash-strapped company.

In recent weeks, the bank’s troubles have continued to pile up. Citigroup decided to bring onto its balance sheet $49 billion in assets from seven struggling investment affiliates, a move that further depleted its already-weak capital ratios. The New York conglomerate also is facing more than $15 billion in fourth-quarter losses stemming from its exposure to mortgage-related investment vehicles.

Citigroup is hoping to unveil the investments Tuesday when it reports fourth-quarter earnings. At the same time, the company also could announce that it is cutting its dividend payment.

As noted earlier, the FT did not mention Al-Waleed and was more specific as to which parties might be in for how much:

Under the proposal being discussed, the bulk of the money – roughly $9bn – would be most likely to come from China, people familiar with the negotiations say. The Kuwait Investment Authority would contribute about $1bn, while $2bn to $4bn would be raised through a public placement of shares.

The formula is still being adjusted and there could be last-minute changes, the people involved say. It is also possible other investors will participate….

“The second round is going very well, because Citi is seen as US Inc,” says the regional head of a US investment bank in the Middle East. Citi de c lined to comment….

The deal would mark the first time that the KIA has invested in an ailing US financial institution. KIA, which is known as a conservative investor, is taking a portfolio approach to the US financial crisis, looking to acquire small stakes in many troubled financial firms rather than putting a large chunk of money in one bank….

The most likely Chinese investor in the Citigroup deal is probably a bank such as China Development Bank…Another possibility would be an investment arm of the government, although the distinction between government and quasi-private money is often blurred in China…..

Citi’s capital-raising structure differs from the first round. That involved a complex security that converts into Citi shares with a generous 11 per cent coupon.

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One comment

  1. Anonymous

    it sounds like a good outcome in the short term as it makes bankruptcy more remote but for long term shareholders, this addition of capital is dilutive and should keep a lid on potential appreciation.

    Adia has structured its participation as a mandatory convertible that will result in dilution for existing shareholders in 2010-2011.

    It’s called forward dilution aka sacrificing the future to keep a present

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