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What's going to happen with CITI?

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September 06, 2009 – Comments (3) | RELATED TICKERS: C

I just finished reading the 41 page proxy that they sent out to try and get my vote for a number of things, but primarily to allow for a change in their Articles of Incorporation to allow them to go from being able to issue 15B shares, to issuing 60B shares.

Unfortunatley I read it too late to cast my vote by the Sept.2 deadline. Not that my paltry holdings would have any impact on the outcome.

It is obvious that they are going to issue more shares and that they are going to do a reverse split.

I would not even begin to  try to explain all of the various scenarios and possible outcomes they talked about, but am posting this more to elicit other peoples thoughts.

So please post what you think will happen, and hopefully why you feel that way. Then maybe we can all come to some, at least semi-intelligent decision.

In a nutshell ( and just my limited understanding of it ), they are exchanging newly issued common stock to private holders of $12.5 B of preferred stock, and $12.5 B of Govt held warrants. There are a lot of ifs, ands, and buts involved, depending on who agrees to do what, and how much they agree to do, but that is the simple (and for me simple is what is needed) explanation of what is happening.

As a result of issuing these additional shares, there will be a massive number of shares outstanding, so they will be doing a reverse split. In addition, they want to get the price of their shares up to a more normal (whatever that may be) level.

They will also have the option of issuing more shares for general corporate purposes. (Read CAPITAL).

There are many different ratios proposed for this reverse split, but in my opinion will likely be around 1-5, but could be 1-10, depending on the share price at the time.

This will of course, open them up to short selling,  which will probably mean a lot of fluctuations in the shorter term.

I am still long on Citi, and expect them to pay off in the longer term (my horizon is 2-3 years), but what will finally drive the price in the long run is earnings, as it does for all stock.

This is a long post for a one eyed dyslexic to try and edit, so if there are typos please overlook them and fill in the right words.

I view this more as a reduction of debt than totally dilutive. I say this because even though the preferred shares and warrants are technically equity, the interest being paid on them makes them act more like bonds than shares.

I also want to note that KIA (Kuwaiti Investment Agency) has stated that at least for now, they are holding on to their 3B dollars invested in Citi. 

Also bear in mind that they may not be masters of their own choices right now. 

What are your thoughts? Please give reasons if you are so inclined.

Thanks. 

 

3 Comments – Post Your Own

#1) On September 06, 2009 at 3:19 PM, beilock (37.60) wrote:

Good afternoon, thanks for the article. Well, if what you say is true, then yes, all evidence points to a reverse split. With the bigger share price they might even be forced to give up some dividends even though they're pretty far in the hole. I like the 2-3 year plan for Citi but haven't pulled the trigger. I think a strong rebound in the financial sector is likely if CIT announces a feasible restructuring plan before the October 1st (?) deadline. If CIT de-zombifies itself, so will Citi, and the other zombie stocks (I'm still bearish on FNM and FRE). That being said, September is definitely a do-or-die month. Best of luck!

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#2) On September 06, 2009 at 5:55 PM, rd80 (97.08) wrote:

The increase in authorized shares is to cover the conversion of preferred to common that happened the end of July.  The gov't converted $25 billion of their common and another roughly $30+ billion of privately held preferred was converted to common.

Here's the Citi announcement of the conversion deal.

There were some clauses in the conversion deal that would have been very ugly if the authorized share count hadn't been increased to allow the conversion.  I don't recall the details, but it was definitely in your best interest to go along with the increased share authorization.

When the smoke clears, Citi will go from 5.5 billion shares outstanding before the conversion to 22 billion outstanding after.  That doesn't take the possible reverse split into account.

Morgan Housel addressed the fact that most quote pages don't yet show the dilution from the share conversion in this article.

Shameless self-promotion - I covered the conversion, focused on the gov't piece in my blog here.

What will happen - the new shares will be issued for the preferred stock conversion.  I have no idea if C will need to issue more shares to raise capital or if they'll do a reverse split.
IMHO, C has run way past reasonable valuations.  But, I haven't even risked a CAPS red thumb on it because I don't want to jump in front of a runaway train.

No position in C.

 

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#3) On September 06, 2009 at 7:15 PM, Teacherman1 (28.84) wrote:

They stated in their proxy that they would be going from an authorized 15B to an authorized 60B shares. They also stated they would be doing a reverse split to raise the price of their shares.

I believe they issued some interim securities which will be converted to common. They also mentioned the Govt would be converting warrants.

They specifically mentioned $12.5 B private and $12.5B Govt.

Since this proxy came out way after July,  I assume they are doing more than appeared in the above referenced articles.

I prefer the Govt be a holder of common shares. That puts them in the same boat with me.

I also think there is a good chance they will be breaking it into at least 2 pieces.

Since I am in at $2.99, I am not overly concerned at this time, and still think that they will be worth much more rather than go "belly up".

I haven't bet the ranch on it, so either way I am ok. I won't go broke, and I will not become a millionaire.

They are the most speculative of my 6 banking stocks.

JMO and worth exactly what I am charging for it.

Thanks for the comments. 

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