Citigroup: More Capital Raises Could Come as Common Equity

Shares of Citigroup Inc. (C) have already fallen 10% so far in 2008 and are down 50% in the past 12 months. And if you think the pain is over, William Tanona will tell you otherwise.

The Goldman Sachs analyst, who has a “sell” rating and $20 price target on Citigroup, estimates earnings per share [EPS] dilution of about 2% on a full-year basis given the investment bank’s announced $3-billion common stock offering after the bell on Tuesday. The assumed price is $25 per share. Mr. Tanona lowered his 2009 and 2010 EPS estimates by $0.05 to $2.95 and $3.70, respectively. He noted that this offering represents Citigroup’s fifth capital raise for a total of $40-billion in the past five months.

The analyst told clients:

Although the company indicated that it was raising the common equity to ‘optimize’ its capital structure, we struggle to see how selling more expensive common equity optimizes its capital structure unless it was at risk of having its debt downgraded by one of the rating agencies.

He believes one or more of the ratings agencies were not comfortable with Citigroup’s current capital mix, which led to the $3-billion offering. If this proves correct, additional capital raises will also likely come in the form of common equity, Mr. Tanona added. This is most dilutive for shareholders, but a positive for debt holders.

The market doesn’t seem to like the news as Citigroup shares were down 2.5% minutes after the market opened on Wednesday.