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Here are highlights from Tuesday’s Analyst Blog:
Government Loosens Grip on Citi
The fifth and final sale of the remaining 2.4 billion shares of Citigroup Inc. (NYSE: C) announced by the U.S. Treasury yesterday will exhaust government’s stake in the company. The Citi shares were acquired by the government a couple of years back as a part of the company’s participation in the Troubled Asset Relief Program (TARP).
The Treasury expects to receive net proceeds of $10.68 on the basis of the proposed offering price of $4.45 per share for a total of 2.4 billion shares. The government had acquired 27% ownership in Citigroup upon its conversion of $25 billion of rescue money into the latter’s common stock in 2009.
Citi, which had a huge exposure to troubled mortgages in the form of collateralized debt obligation (CDO), received a total of $45 billion in bailout funds in 2008. There was also a loss-sharing agreement with the Treasury for Citi’s potential losses on $301 billion of its assets, later terminated by the company. However, it had repaid $20 billion of it debt to the Treasury in the following year.
The Treasury has been selling off its stake in tranches since April 2010. In the first phase, the Treasury sold 1.5 billion shares in Citi for gross proceeds of around $6.2 billion in May. In its second phase, the Treasury sold 1.1 billion shares in July, the third phase witnessed sell out of another 1.5 billion shares in September. Altogether these transactions provided the Treasury with gross proceeds of $16.4 billion. The Treasury’s fourth pre-arranged written trading plan sold 1.5 billion additional shares from October to November.
The role of sales agent for the above stock sale is being performed by Morgan Stanley (NYSE: MS).
The bailout of New York based Citi is expected to turn out profitable for taxpayers with 89 cents of profit per share on a total of 7.7 billion shares emanating from average selling price of $4.14 and a lower average conversion price of $3.25. Apart from this, the government also realized a net gain of $2.246 billion in the offering of all Citi TRUPS in September. The Government also pocketed $3 billion of dividends on its preferred shares.
Though, Treasury will do away with its holding in Citi’s common stock upon the conclusion of this transaction, it will still own the right to exercise warrants on 465.1 million Citigroup shares. Moreover, the Federal Deposit Insurance Corp. holds $800 million of the bank’s trust-preferred securities on behalf of the Treasury.
The bailout program has received criticisms from the average taxpayer on grounds of helping those companies whose actions have in turn resulted in the economic crisis. Although the economy is now showing signs of gradual recovery with the stabilization of large financial institutions, tumbling home prices and a high unemployment rate continue to prevail. However, the Treasury has received decent returns on many of their financial-sector investments. According to Bloomberg, it has earned a 14% return on the $10 billion invested in Goldman Sachs Group Inc., (NYSE: GS), and 13% on the same amount to money lent to Morgan Stanley. Bloomberg also estimated that the government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, indicating an 8.2% return over two years.
The shedding of its stake by the Treasury is a positive for Citi as it reduces the government overhang on the stock. Also, the pace of selling the stake is in sync with the original intention to complete sell off by the end of this year.
Citi’s core business is progressing well and the international business is gaining momentum, though the earnings in the coming quarters are expected to remain pressured following the recent reform Act and the shrinking of its revenue base due to the Citi Holdings business reduction.
Citi currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the company’s business model and fundamentals, we have a long-term “Neutral” recommendation on the stock.
Good News for Bristol-Myers
The US Food and Drug Administration (FDA) delivered a boost to pharma giant Bristol-Myers Squibb Company (NYSE: BMY) by accepting the supplemental Biologics License Application (sBLA) for the subcutaneous formulation of Orencia (abatacept) for treating adults suffering from moderate to severe rheumatoid arthritis (RA).
The confirmation of the receipt of the sBLA, filed with the FDA in the third quarter of 2010, was received on October 4, 2010. The application was filed on the basis of data from four multinational late-stage studies conducted for the RA indication. The program evaluated 1,847 adults suffering from moderate to severe RA.
RA, a systemic, chronic, autoimmune disease characterized by inflammation in the lining of joints, inhibits mobility due to the affected joints losing their shape and alignment. The incidence of RA is on the rise and the market has a huge unmet need.
We note that Orencia is already approved for multiple indications both in adults and children. Orencia's approval for the additional indication would be a further feather in Bristol-Myers’ cap. The drug would target a highly lucrative RA market which is expected to register a 6% annual growth and reach $14.3 billion by 2017 according to GlobalData.
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