Citi Keen To Divest Phibro

Citigroup Inc. (C) is working toward selling its commodities unit Phibro, one of the bank’s most profitable businesses, to raise money and stave off political anger over a potential $100 million payout to Phibro’s star trader Andrew Hall. Citigroup has already held discussions with potential buyers but a deal is not yet imminent and the plan to sell the unit does have a probability of failure.

In case, any of the ongoing deals fail to materialize, Citigroup will consider selling a majority stake in Phibro while retaining a minority interest for a few years. Phibro is Citigroup’s domestic hedge fund that trades with the bank’s capital and has contributed an estimated $2 billion to its bottom line in the past five years. The sale of Phibro would provide Citi with hundreds of millions of dollars but will also rob the bank of a profitable unit.

Citigroup has been mulling a number of options for Phibro for sometime, such as divesting a part of the unit, opening it to outside investors or spinning it off entirely. However, now management is in favor of a complete divestment of the unit. The main underlying reason for the divestment is to dodge the compensation controversy as the other options would still leave the company vulnerable to criticism over Hall’s pay.

Andrew Hall’s contract with the company guarantees him a share of Phibro’s profits and could see him collect a bonus of about $100 million this year. This is a controversial issue especially when the U.S. government is close to announcing its decision on pay packages for top executives of banks that rely on federal aid.

Furthermore, unlike most other bonuses, the terms of Mr. Hall’s pay-out are legally binding. Citigroup, once the largest U.S. bank by assets, fell behind last year after a series of acquisitions by rivals. The bank has been severely hurt by billions in losses and write-downs of problem loans and toxic assets.

The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% equity ownership stake. Top-level management at the company is conceiving plans to downsize the government’s stake in the company through a multibillion-dollar stock offering.

During the second quarter of 2009, Citigroup reported results separating the firm into Citicorp and Citi Holdings. The company is currently undergoing a major restructuring in its businesses and plans to hold down its assets and divest non-core businesses in Citi Holdings.

Citigroup will release its third quarter 2009 earnings on Oct 15, 2009 with a conference call scheduled later in the day to discuss its results. Ahead of its results, we maintain our Neutral recommendation on the stock.

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