U.S. Said to Be Exploring Sale of Citigroup Stake (Update1)

By Robert Schmidt and Bradley Keoun
Sept. 15 (Bloomberg) -- The U.S. Treasury Department and Citigroup Inc. have begun discussing how to sell the 34 percent stake that the government acquired in the rescue of the bank, people familiar with the matter said.
The Treasury, which owns 7.69 billion common shares after a recent preferred-stock conversion designed to shore up the bank’s capital, may start unloading the stake as soon as October, one of the people said. It aims to sell the holdings over the next six to eight months, the person said.
A sale, a year after Lehman Brothers Holdings Inc. filed for bankruptcy, may bring Citigroup Chief Executive Officer Vikram Pandit closer to an exit from the bailout program while allowing the government to claim a profit. Because the New York- based bank’s stock price has gained since $25 billion of bailout funds were exchanged for common shares, the Treasury is sitting on a paper profit of $9.77 billion.
"Given the conversion and what’s happened to the stock price, it is likely that the government would make money on it," said Moshe Orenbuch, an analyst at Credit Suisse Group AG who rates the shares "neutral."
Citigroup’s stock closed at $4.52 a share yesterday, a 39 percent premium over the Treasury’s conversion price of $3.25.
The shares slipped to $4.42 in German trading today.

$52 Billion Rescue

The planning is in the early stages, and some transactions may need regulatory approvals, the people familiar with the matter said. Under one scenario, the shares would be sold to public investors in blocks over six to eight months. In another, the government may sell a small amount of stock daily or weekly, said the people, who declined to be identified because the talks are private. Under a third option, the shares would be sold at once in a managed offering.
Treasury spokesman Andrew Williams and Molly Meiners, a spokeswoman for Citigroup, declined to comment.
Citigroup, the third-biggest U.S. bank, received $52 billion in bailout aid, and a sale of the common stock would leave the Treasury with a $27 billion investment. That stake is in trust-preferred shares -- a class of securities that ranks senior to common stock and junior to most debt.
If the Treasury sells its shares through a managed offering, the bank may piggyback on the effort by simultaneously issuing new shares to help pay off the remaining bailout funds, one person familiar with the matter said.

‘Prominent Role’

The Obama administration has begun efforts to wind down the government’s $700 billion financial rescue program, while pledging to manage the withdrawal carefully. In a report yesterday, the Treasury said it was "committed to ensuring the stability of financial markets" and that "the process of exit will be prudent, not hasty."
"While this demonstrates the federal government’s intent to wind down investments in specific companies, its prominent role in the financial-services industry will remain for the foreseeable future," said Stephen Myrow, managing director of ACG Analytics LLC, a Washington-based independent investment research firm.
Other bailed-out banks, including Bank of America Corp., based in Charlotte, North Carolina, and San Francisco-based Wells Fargo & Co., have pledged to repay TARP money.
JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, all based in New York, repaid TARP funds in June. In a speech yesterday, President Barack Obama said taxpayers have earned a 17 percent return so far on stakes repaid by banks.
Richard Parsons, chairman of Citigroup’s board, said in an interview yesterday in New York with Bloomberg Television that he had "every confidence that Citi will be able to exit the TARP program, and actually be able to give the American taxpayer a decent return." He declined to provide a time frame.

Citigroup Shares

One question that probably must be answered before a sale goes forward is whether the market for Citigroup shares is deep enough to allow the Treasury to liquidate the stake without driving down the stock price, Credit Suisse’s Orenbuch said.
There are about 23 billion Citigroup shares outstanding, and about 15 billion of those are already in public hands, according to Bloomberg data. About 914 million shares changed hands each day on average during the past four weeks.
The market is "certainly deep enough to take a couple of billion shares, some multiple of a day’s volume," Orenbuch said yesterday in an interview.