Citi Got a Good Deal on the Online Bank 'Egg'

Citigroup (C) recently paid approximately $1.13B for Egg, the largest pure online bank in the world. Taking a quick look at the numbers, Citi acquired approximately 3M credit card customers and approximately $18.6B in assets (as of December 31, 2006). This represents a small increase to the total asset base of Citi, which is now greater than $1.8 trillion.

A comparison to recent past mergers, on a dollar paid per asset dollar acquired basis, shows that either Citigroup got a great deal or other banks overpaid. Bank of America (BAC) paid $48B for FleetBoston Financial in 2004, which had $196B in assets at the time. It also paid $35B for MBNA in 2005, which had $123B in credit loans.

J.P. Morgan Chase (JPM) paid $58B for Bank One in 2004, gaining $320B in assets. Wachovia (WB) paid $25B for Golden West in 2006, acquiring over $125B in assets, and $14.3B for SouthTrust in 2004, which had $54B in assets. Regions Financial (RF) paid $10B for AmSouth in 2006, acquiring $58B in assets.

The purchase of Egg represents minimal risk for Citigroup. It is acquiring an online bank with online assets, which can be combined with Citi’s current online technology or maintained separately. The deal also represents a fourfold increase in U.K. customers and increases Citi’s U.K. market share from under 1% to approximately 7%.

Disclosure: The author does not have a position in any stocks discussed at the time of writing.

C 1-yr chart

Comments

[David Chang_:]

The only problem with the analysis is that the acquisition is not accretive. In fact the failure to mention that Egg has not made a profit from the operations makes this acquisition quite different from the others quoted.

2007 Mar 04 04:34 PM

[RPK:]

When I originally wrote the analysis I had included a paragraph on the lack of profitability at Egg. This is obviously why Citi got such a good deal. Most of the losses, however, are due to unsecured loans going bad. My feeling is that Citi will weed out bad loans and apply a stricter approval process for future loans. In the end I still feel Citi got a good deal on which to expand their online presence.

2007 Mar 05 11:30 AM

[hammer:]

with the test of time and twenty-twenty hindsight, this was a terrible acquisition. It never created any traction and was basically flushing money down the toilet. They could have used the capital.

Jun 25 09:54 AM