Wednesday, November 30, 2005

C Major: Will Citi Bust a Move?

If we could find you a financial services giant with over 200 milion customer accounts in more than 100 countries that's trading at a meager 11 X projected 2006 earnings, would you be interested?

What if we now told you that this same behemoth was expected to break itself up in 2006, reposition its core assets, and redistribute hidden value among shareholders?

We have it -- her name is Citigroup (C).

Rumors of a breakup have been floating around ever since Tom Brown penned a modest proposal for "letting value bloom" at Citi.

The more salient points of Brown's argument:

The idea behind Citi was flawed from the beginning—which is one reason the stock’s P/E has eroded steadily for the past seven years.By contrast, a breakup of the company would be a great strategic move and profound gesture to shareholders and competitors. In our view, a leaner, more focused group of legacy Citi businesses would emerge and be vastly preferable to the current bureaucratic Byzantium. The units would be much more effective competitors as smaller, focused players than they are now...

Citi can no longer generate meaningful company-wide organic growth. . .we believe each of the company’s businesses would likely be more competitive on a standalone basis, with leaner management structures, greater strategic focus, and increased accountability at all levels – without losing most of the benefits of scale. And even assuming very conservative valuations for each piece, the parts are almost certainly worth more than the whole.

Citi was built via acquisitions patched together by Sandy Weill's army in the 1980s.

As Brown asserts, Citi's monomania got the best of it.

Citi's become one big turtle whose common stock creates the same level of excitement you get by watching paint dry.

Citi's enterprise value upon breakup is pegged at $56 to $60 a share.

On 11/30, we're initiating coverage on Citigroup -- whose stable earnings and industry leading ROA are just as compelling as the aforementioned breakup scenario -- with a strong buy rating.

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