Citi To Convert $58b Preferred Shares, Adopts Poison Pill

Published: 10-Jun-2009

The move will dilute the US governments stake in the bank to 34%, and thwart investors and hedge funds from holding sizable stakes.

Citigroup has launched a $58 billion conversion of preferred shares into common stock that will minimise the stakes of not only investors and hedge funds but also US government’s, considerably. Creation of this provision is another indication of the internal changes forced upon the bank to raise billions of dollars of capital from the government and other investors, to counteract the huge losses suffered during the ongoing financial crisis.

Being dubbed as a poison pill, as per the new provision, if an investor buys a stake of more than 5%, or if a current shareholder of more than 5% increases his holding by more than 50%, all other investors are entitled to purchase one share for every share held at a 50% discount to the market price.

Industry experts are of the opinion that the provision is intended to prevent investors and hedge funds from building up sizable stakes in the bank, and also to discourage the current shareholders from increasing their holdings. Theresa Gabaldon, a law professor at George Washington University in Washington, DC, said: “It indicates that Citigroup management may be concerned about entrenchment, which is a reason to adopt what is an anti-takeover device, or is very concerned about the $43 billion of tax benefits.”

However, the bank’s executives called it as a tax benefits preservation plan. They argue that the rare measure is driven by the US tax law and not exactly a poison pill intended to prevent takeover efforts. US tax laws restricts companies ability to use tax losses on the balance sheet when more than 50% of their shares are held by investors with stakes of more than 5%. As a result, they have to fetch an equal amount of capital from somewhere else, putting a further strain on balance sheet.

Citi may issue approximately 17 billion new shares, diluting the holdings of existing shareholders by 76%. It will also convert $33 billion in preferred shares held by non-government investors.

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