Conversion of Citi's Preferred Shares Could Bring Stock Down Temporarily

This is not a valuation call, merely a supply/demand observation. As highlighted by Dealbook and an analyst at Fox-Pitt, the conversion of Citi's (C) preferred shares (remember the first round of Citi life support provided by Singapore, Kuwait, Sandy Weill himself, and Prince Alwaleed?) could lead to massive selling of newly converted shares. Preferred owners may not want shares of Citi. The preferred paid nice dividends, the shares have a much different profile.

Given that the conversion of Citi's preferreds will dilute existing shareholder by 76%, there will obviously be a lot of new share supply coming onto the market. Most preferred holders might not sell immediately, but even if a minority decides to sell, it could be a lot of selling in a short period of time. Which the Fox-Pitt analyst, who sees Citi worth $4, says could be a buying opportunity. The "deal is set to expire July 24, and distribution would be made on July 30."

The United States government will likely hold onto its 7.7 billion new shares of Citi, but other investors may have a different idea. Citi is expected to deliver 5.9 billion common shares to owners of Citi’s publicly held trust preferred securities, known as TruUps, and 3.8 billion to the holders of its privately placed preferred stock, a group that includes sovereign wealth funds from Singapore and Kuwait, Saudi Prince Alwaleed and the former Citi chairman Sanford I. Weill, among others.

Mr. Weill might not rush to sell his Citi stock, but Mr. Trone said he believed that a “substantial portion” of the private holders of the preferred shares did not own common equity now, and might decide to sell the new stock they got in the conversion..

Disclosure: The author does not own shares of Citi.

Comments

[maryanne]

Exactly, most preferred holders brought it for the income. Once the income disappears, they're going to dump. I'm really considering selling C-M and C-F now than to get greedy and try to get $24+ post conversion when everyone else probably got the same idea.

2009 Jun 25 05:05 PM

[MIKETRADER]

Youre not taking in account the ARB play, when I recieve like most Arbs my citi commons in exchange of my CITI PREFS it will be netted out against my citi shorts, so I dont expect a significant downside. Range bound betweeen 2.90 to 3.50

2009 Jun 26 05:40 PM

[Vincent Fernando]

Interesting point in regards to the arb, that hadn't occurred to me, so yes maybe some of the selling pressure will be mitigated by such players who have complementary short positions in citi shares.

2009 Jun 28 06:15 PM