Treasury Puts Brakes on Citigroup Sale

The U.S. Treasury has postponed its plan to sell $5 billion of its 34% stake in Citigroup Inc. (C) after a lackluster response from investors following Citi’s stock offering. Citigroup stock has been under pressure this morning, in an overall soft market.

Citigroup priced its $20.5 billion offering yesterday. However, due to a poor response by investors, Citi had to sell the shares at a discounted price of $3.15 a share. This was 10 cents below the price that the Treasury had paid to buy the shares earlier.

The Treasury has also announced an extension of its lock-up period on the sale of its 7.7 billion shares of Citi to 90 days from 45 days following the completion of this offering.

Citigroup had received $45 billion of TARP fund last year. Later, around $25 billion of that was converted into common stock, representing nearly 34% of its stake held by taxpayers. The Treasury had to pay $3.25 a share for this stake. Citi has $20 billion of TARP funds to repay.

Yesterday, Citigroup has priced its 5.4 billion stock offering at $3.15 per share, generating net proceeds of approximately $17 billion. Citi has also priced its tangible equity units offering at $100 each, generating net proceeds of approximately $3.5 billion, of which approximately $2.8 billion would be counted as equity.

However, the good news is that the Internal Revenue Service has given a tax break of $38 billion to Citi for its TARP payback agreement.

While the repayment of the TARP fund through the common stock offering will free Citigroup from government interventions and pay restrictions, this offering leads to significant earnings dilution for Citi.

Bank of America (BAC) has already repaid the entire $45 billion of TARP funds to the Treasury following its $19.3 billion of equity offering recently. Wells Fargo & Co. (WFC) has also announced a $12.25 billion of common stock offering to repay the $25 billion TARP fund it received.

Other major banks that have already paid back their TARP funds to the Treasury include Goldman Sachs (GS), JPMorgan Chase (JPM) and Morgan Stanley (MS).

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