Is It Time to Put Citigroup Out of Its Misery?

Includes: BNS, C, RY
by: Mark McQueen

This post may certainly fall into the crazy ideas category, however, with Goldman Sachs slapping Citigroup (NYSE:C) with a sell - despite Citigoup shares being at a 10-year low - now is the time for crazy thinking. In the spirit of the ABN Amro (ABN) deal (see prior post “Matt Barrett the real winner in ABN Amro deal” April 23-07), Canada’s Royal Bank (NYSE:RY) and Bank of Nova Scotia (NYSE:BNS) should get their I-banking teams working on a joint bid for Citigroup.

Why? First, here’s some math (from Google Finance):

  • Citigroup’s (C) market cap is about $92.8 billion
  • Royal Bank’s market cap. is $59.6 billion
  • Bank of Nova Scotia’s market cap is $47.1 billion
  • Joint market cap of $106.7 billion

In a “merger of equals” scenario, Royal and Scotia could offer Citi’s shareholders a 15% premium to Thursday’s close. The three would join forces to create “NewBank.” Under that structure, Citi’s current shareholders would own 50% of NewBank, and the Canadian contingent would own the other half. Back in the era of “pooling of interest transactions,” you might have considered such a deal. However, it’s the wrong approach in today’s accounting world.

The better transaction for the two Canadian banks would be to split Citi in two. Royal takes the U.S. and Canadian operations, while Scotia takes Mexico, and the rest of the world. RBC Centura becomes a huge powerhouse overnight, and Scotia bulks up where it is already strong and vibrant. With operations in 49 different countries other than Canada, Scotiabank is the perfect fit for Citigroup’s 100 nation network.

From a Citigroup shareholder standpoint, they would get a certain number of RBC shares and a certain number of BNS shares in exchange for their stake in Citigroup. This de-risks things dramatically for the suffering Citigroup shareholders, as the strength of their balance sheet doubles overnight, so to speak.

I know it would be alot of work (although not for us). Canadian bankers are often seen to be too conservative for meaningful growth via M&A, but that reputation is changing, as RBC, TD Bank (NYSE:TD) and BNS in particular have made decent strides in various locales via strategic acquisitions.

With yesterday's release of the “Compete to Win” report of the Competition Policy Review Panel, one can’t help but consider their analysis of the Canadian banking lanscape:

Because Canada represents 3 percent of world capital markets, reaching the scale of the world’s largest institutions will depend on how well Canadian banks fare in the contest to acquire foreign banks.

Amen. Unless the federal government accepts the Panel’s recommendation about domestic bank mergers (see prior post “Mellon and BONY merge” December 4-06) and mergers between Lifecos and Banks (see prior post “Will Manulife come to CIBC’s rescue?” December 19-07), all RBC and Scotia can do in the meantime is to seriously think about the opportunity that Citigroup might present in the days to come.

And that’s before Citi’s $92 billion market cap. falls even further in the wake of the Goldman thrashing. C’mon fellas. Dream big. Before Manulife’s (NYSE:MFC) Dominic D’Alessandro finds a way to do the deal instead.

Disclosure: In our household, we own BNS.