Is It Time to Put Citigroup Out of Its Misery?

This post may certainly fall into the crazy ideas category, however, with Goldman Sachs slapping Citigroup (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 (RY) and Bank of Nova Scotia (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 (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 (MFC) Dominic D’Alessandro finds a way to do the deal instead.

Disclosure: In our household, we own BNS.

Comments

[NYC Diesel 69:]

Don't tell me that you get paid to write these outlandish articles.

Come on man. do you want to global economy to crumble?

2008 Jun 27 08:41 AM

[ccyork:]

why destroy 2 perfectly wonderful banks with such an ill-informed merger. don't make me sell my BNS. it's my favorite bank!

2008 Jun 27 09:36 AM

[Redman:]

This is an interesting concept..nay the fact that it would need cross-border regulatory approval...not to mention approval from Citi's Mid-east investors as well.
I remember in the 90's when Citi was trading below $10...and was referred to as "sh-itty bank". Then came Weill & Co. and turned it into the future mess that it became!
On another note...I also find it amazing that despite all the problems the brokers and banks have...they can still find it in their money-hungry hearts to downgrade (rate) their peers. The marketplace has entered a stage that I haven't seen in almost 30 years in the biz...complete 'mundo bizarro'..I mean look at the extremes...if this isn't the proverbial "accident waiting to happen"..then I'm not quite sure what truly will occur.

2008 Jun 27 09:36 AM

[TA:]

That's a horrible idea - ruin two great banks for this?

I own both - don't even think about it

2008 Jun 27 12:49 PM

[ken wender:]

Citi should turn off the lights now and avoid the rush.

2008 Jun 28 07:35 AM

[FreddieBoy:]

Citi will more than likely become Citi of the United States. We have not had a bank "nationalization" in 75 years but this could be the first. Freddie, Fannie, and Citi. !!

2008 Jun 28 07:43 AM

[Tark:]

I don't know why people are trashing this article. I think its interesting and a good read amongst all the new and reports out there.

Why is it wrong to have a imagination in the investing world?

2008 Jun 28 01:12 PM

[Tark:]

Is it wrong to have a imagination in finance?

I don't see why people are trashing this article, its a nice read amongst all the news and reports out there. Obviously this wont rely happen but its nice to ponder isn't it?

2008 Jun 28 01:19 PM

[Emerald:]

Everyone seems to forget the financial windfall the middle east guy received the last time he invested in Citi. Citi is in trouble but will make a lot of money three years from now. Get "C" while it's cheap!

2008 Jun 28 03:20 PM

[YMCA:]

Canadian Banks are generally in good financial health and they should remain financially sound. If Canadian banks had been allowed to merge among themselves they would have entered in a different arena. The one of the big US financial institutions and would have had no choice but to play the same game that brought them close to bankruptcy today.
The best thing that happened to the Canadian banks is when the Federal Government refused them to merge. It probably saved their lives
Why should the Canadian banks make such big transactions? It' very dangerous. You can eat an elephant but only with small bites at the time.

2008 Jul 01 02:10 AM