Citigroup buys British online bank for $1.13bn

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Citigroup agreed on Monday to buy Egg, a British online bank owned by Prudential, for $1.13bn (€872m), the latest in a series of small deals to expand its retail presence abroad.

With the acquisition, Citigroup will quadruple its number of credit card customers, to 2.9 million, and broaden its reach by the use of an Internet site to open savings accounts and mortgages in a country where it has five retail branches.
Financial Times

The sale price is £375m ($736m) less than the £950m valuation Prudential put on Egg when it bought out minority shareholders in the business in January last year. It is also significantly lower than the price other banks, including Royal Bank of Scotland, were willing to pay for Egg when it was put up for sale in 2004.

The cash transaction, which appeared to be at little more than twice book value, follows a string of small deals by Citigroup to buy or acquire stakes in banks in China, Turkey and Central America as well as Quilter Holdings, the British wealth management arm of Morgan Stanley.

Under pressure from investors, the chairman and chief executive of Citigroup, Charles O. Prince III, has turned to acquisitions to accelerate the growth he promised from a longer-term strategy focused on internal and international expansion. He has significantly cut back on investment spending and has moved to rein in expenses.

The changes seem to indicate that Mr. Prince is listening to investors at a time when many outsiders have questioned how long he will hold onto the job. Amidst a management shake-up last week, the bank giant is now searching for a chief financial officer who might be seen as Mr. Prince’s potential successor. They also highlight the tightrope that Mr. Prince walks. While an acquisition strategy will deliver earnings faster, one driven by internal growth could have a much bigger payoff.

Wall Street analysts, meanwhile, have asked whether a series of small acquisitions is enough to move the profit needle at a bank that generated more than $21 billion in net income last year.

Reports of a potential acquisition of Egg emerged last month, but yesterday’s announcement caught some by surprise. At a year-end presentation in December, Mr. Prince said that on the consumer side, Western Europe was far less “an attractive acquisition territory for us in light of our opportunities in the emerging markets.” Mr. Prince made similar comments over the weekend at the World Economic Forum. Executives said that Mr. Prince was referring to the prospects of a major European retail bank acquisition, not a smaller deal.

Chief Executive Charles Prince has eschewed blockbuster deals and, instead, focused on targeted and strategic acquisitions such as the Egg Banking purchase. In December, Citigroup announced it was buying Quilter, a wealth management unit in the United Kingdom, from Morgan Stanley; at the same time, it bought a Central American banking company in a stock-and-cash deal.

Citigroup also has been moving in recent years to expand its online banking presence. Its U.S. retail banking arm launched Citibank Direct in March 2006 to offer high-yield savings accounts to compete with similar offerings from other Internet banks and to attract more people to its online banking and bill paying services.

Ajay Banga, chairman of Citigroup Global Consumer Group – International, said that Citi hoped to capitalize on Egg's reputation for a consumer-friendly Web site and strong brand recognition.

He said that Egg's strength has been its "ability to deal with online customers in a way that makes them happy and sells them other products as well."

Citi, he said, can bring its expertise to improve Egg's less-than-impressive lending record and to provide new products, including checking accounts and investments such as mutual funds.

At the same time, Banga said, Citi could apply what it learns from the Egg model to its Internet operations in other countries.

"I would like to take to as many places as I can whatever I can learn from them," he said.

The transaction, which is worth 575 million British pounds, will probably boost earnings in the first year, Citigroup said in a statement.

Egg was founded in 1998, and it currently has more than 3 million customers. Its products and services including online bill paying, credit cards, personal loans, savings accounts, mortgages and insurance.

Citigroup's British consumer business now serves more than 1 million customers, primarily in the wealth management and near prime lending markets, and offers current, savings, and foreign currency accounts, credit cards, investments, offshore banking, personal loans, and mortgages.

Citi currently has just five retail bank branches and 100 consumer finance branches in Britain. Banga said that the increased online customer base that comes with Egg means "you'll see me building a few more branches there."

Prudential said the sale will enhance its earnings per share this year and the proceeds will be used to reduce net debt.

In late 2005, Prudential paid more than £211 million to buy its remaining 21 percent ownership stake and later vowed to restore Egg to profitability. That never happened, and Citigroup scooped the entire operation up for £575 million, or $1.13 billion, in yesterday’s deal.

Still, questions about the quality of Egg’s loans persist.

Ajay Banga, a co-head of global consumer business at Citigroup, suggested that Citigroup’s lending practices could help engineer Egg’s turnaround.

“They certainly have had an increase in losses over the past couple of years — it’s mostly from a couple of years of customer booking,” Mr. Banga said, suggesting that the bad loans were made in 2004 and 2005.

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