(Recasts, adds details, share movement) Nov 24 (Reuters) - Citigroup Inc’s (C.N) deal with the U.S. government is relatively shareholder friendly, as it comes with limited dilution, yet covers most of the bank’s risk, a Fox-Pitt Kelton analyst said in a note to clients.
Citigroup shares surged more than 60 percent in morning trade after the U.S. government agreed to shoulder most of the potential losses on $306 billion of high-risk assets and inject $20 billion of new capital into the bank.
The deal also allows the company to continue to reap the cash flows and any upside potential for the problem assets, analyst David Trone wrote in a note to clients.
“We believe this deal will reduce the probability of a depositor or counterparty revolt,” he added.
Citigroup should also be able to get ample breathing room from the bailout for dealing with its various exposures to a deteriorating economy, particularly in the real estate context, he said.
The move to guarantee risky assets is the most effective manner to calm panicked equity investors, which are assuming draconian outcomes, the analyst said.
As part of the rescue plan, the government will receive preferred shares with an 8 percent dividend and warrants to buy $2.7 billion of common stock, comprising about 254 million shares at $10.61 each in return.
Also, Citigroup cannot pay out more than 1 cent per share per quarter over the next three years as dividend without government consent.
The warrants will dilute earnings by about 5 percent, Trone said.
He widened his fourth-quarter loss estimate to 83 cents a share from 79 cents a share. He also estimates a loss of 8 cents a share in 2009, compared with his prior view of profit of 28 cents a share. (Reporting by Amiteshwar Singh in Bangalore, Editing by Dinesh Nair)