Citi OneMain Sale Hits a Snag - Analyst Blog
January 06 2012 - 12:23PM
Zacks
Citigroup Inc.’s (C) effort to sell its
OneMain
consumer-lending unit has hit a roadblock. The company was in talks
with a number of private equity buyers but a sale agreement could
not be reached, according to a Wall Street Journal
report.
The turmoil in the credit markets in the midst of the European
sovereign debt crisis as well as increasing qualms regarding a
global economic slowdown has been cited for the failure to reach an
agreement.
Citi was in
talks with a bidding group for the sale of OneMain. The company was
negotiating with the private-equity investment firm
Centerbridge Capital Partners LLC and
Leucadia National Corp.
(LUK).
OneMain
makes mortgage and other loans to high-risk borrowers. In order to
finance the business, such loans need to be packaged and sold to
investors by the prospective buyers. However, in a stressed
economic environment the market for such securitizations has
dried up.
Such issues are said to be the reason for the failure for
reaching an agreement. We believe that this failure to reach an
agreement will adversely impact the stock’s price in the short
term.
Earlier in 2011, Citi completed the rebranding of its entire U.S. full
service network of 1,300 stores from CitiFinancial. The
rebranding plan was announced in December 2010.
Citi was
in a bad shape during the financial crisis and had to take resort
to government bailout to stay afloat. The company has been
executing a number of strategic reengineering efforts. It has
designated CitiCorp as its core operating unit and
Citi Holdings
as its non-core unit. Citi intends to dispose of its non-core operations and
OneMain
happens to be a part of this unit.
Citigroup’s long-term strategy to shrink non-core assets and
increase its fee-based business mix would also improve its
valuation over time. The divestiture of Citi Holdings, its legacy problem
assets portfolio, is also on track. This run-off will ultimately
reduce the company’s risk profile and free up capital to be
invested in its core businesses.
However, we believe that though this strategy to shrink non-core
assets would improve the valuation over time, the shrinking of the
Citi Holdings
portfolio would result in revenue challenges, partially restricting
the upside potential of the stock. Regulatory issues and sluggish
economic recovery also remain concerns. Yet, its core business,
Citicorp, remains attractive. International business is gaining
momentum and should support its earnings.
Besides Citigroup, the other Wall Street biggie Bank of
America Corp. (BAC) is also trying to remove a large number of
non-core assets to strengthen its capital position and balance
sheet.
Shares of Citi currently retain the Zacks #4 Rank, which translates into a
short-term Sell rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
LEUCADIA NATL (LUK): Free Stock Analysis Report
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