Citigroup Proving Irresistible to Hedge Funds Led by Paulson

Date: Wednesday, February 17, 2010
Author: Nikolaj Gammeltoft and Whitney Kisling, Bloomberg

Firms run by John Paulson, Eric Mindich and George Soros purchased almost half a billion shares in Citigroup Inc. last quarter as more than 120 hedge funds said they bought stock in the bank.

Paulson & Co. reported a stake equal to 506.7 million shares in New York-based Citigroup, up from about 300 million at the end of the third quarter, according to a government filing yesterday. Mindich’s Eton Park Capital Management LP acquired 138 million shares, making the company its largest holding. Soros Fund Management LLC reported 94.7 million shares worth $313.4 million.

Investors may be betting on a rebound in Citigroup after it lost as much as 94 percent of its value during the credit crisis. The purchases came in the same quarter that the third- largest U.S. financial company sold more than 5 billion new shares to help repay government bailouts.

“It clearly doesn’t take a lot to get a decent amount of shares in Citi,” said Christian Thwaites, president and chief executive officer of Sentinel Investments in Montpelier, Vermont, which manages $23 billion. “If the hedge funds are taking any position in it, it’s a feeling that there might be some value to be had.”

Citigroup stock bought by hedge funds outnumbered the amount sold by a ratio of more than 10 to 1 in the October-to- December period, with about 1.2 billion shares added on a net basis, according to Securities and Exchange Commission filings compiled by Bloomberg.

Fairholme Capital Management LLC run by Bruce R. Berkowitz, named U.S. stock mutual-fund manager of the decade last month, bought 214.7 million shares valued at $710.7 million. Hedge fund manager Daniel Loeb’s 15-year-old Third Point LLC also took a new position, adding 25 million shares worth $82.8 million. Soros Fund, Fairholme Capital and Third Point didn’t respond to messages left after normal business hours yesterday.

Average Price

The shares traded for an average of $4.10 in the quarter, 24 percent above its closing price yesterday of $3.31, data compiled by Bloomberg show. The company had 28.5 billion shares outstanding as of Dec. 31, the data show.

Paulson, who earned about $2 billion last year in part by betting the housing market would collapse, started buying his Citigroup stake in the third quarter. His New York-based firm manages about $32 billion overall. Armel Leslie, a spokesman for Paulson, declined to comment.

Eton Park, the New York-based firm founded in 2004 by former Goldman Sachs Group Inc. executive Mindich, said its stake in the bank was valued at $457 million as of Dec. 31, according to a filing. Mary Beth Grover, a spokeswoman for Eton Park, declined to comment.

45 Days

Money managers who oversee more than $100 million in equities must file a Form 13F within 45 days of each quarter’s end to list their U.S.-traded stocks, options and convertible bonds. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from speculating on whether the price of assets will rise or fall.

Citigroup posted a $7.6 billion fourth-quarter loss on costs to exit the U.S. bailout program, giving the company its second straight unprofitable year. Chief Executive Officer Vikram S. Pandit booked an $8 billion pretax charge when he repaid $20 billion of bailout funds in December. Revenue missed analysts’ estimates as trading results fell from the third quarter, helping push the shares down 9.3 percent from their 2010 high.

“The stock has been beaten up,” said Matt McCormick, a banking-industry analyst and portfolio manager at Bahl & Gaynor Inc. in Cincinnati, which oversees $2.7 billion. “The bad news has been priced in.”

Taxpayers still own 7.7 billion Citigroup shares, and Pandit failed to restore the bank to profitability in his second full year in the top job. The 53-year-old took over in December 2007 following the ouster of Charles O. “Chuck” Prince.

New Shares

Citigroup is forecast to earn 9 cents a share this year, or 2 percent of what it made in 2005, based on Bloomberg’s analyst survey. That’s partly because Citigroup has had to issue almost 23 billion new shares to bolster a weakened capital base. Investors who were shareholders prior to the financial crisis were left with about one-fifth their original stakes.

Hedge funds may be speculating on a break-up of Citigroup into individual businesses, according to Diane Garnick, a New York-based investment strategist at Invesco Ltd., which manages about $400 billion.

“The sum of the parts is worth less than each individual part,” said Garnick. “It is easier for investors to assign value to a company if it is broken up into its many component parts. In this market environment people are starting to reward single business unit companies.”

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.