Citigroup to get equity infusion

New York, February 27: Another lifeline granted to Citigroup! The U.S. government and Citigroup (NYSE:C; TYO: 8710; BVPASA: CIT) reached a pact late Thursday wherein the former has agreed to buy a stake ranging between 30 to 40 percent in the besieged financial services giant.

Sources familiar with the matter said that the agreement could be announced as early as Friday morning. As a part of the deal, the Treasury Department has agreed to switch some of the government's current holdings of preferred Citigroup shares into common stock. However, Citigroup will have to persuade private investors to do the same.

The treasury will match the private investors’ conversions dollar-for-dollar, but it has kept the ceiling of such a conversion at $25 billion. The exact price at which the government will convert the preferred shares to common stock was, however, not divulged. Apparently, Citigroup has quoted $5 a share as the conversion price.

Stuart Plesser, a financials analyst at Standard & Poor's Equity Research opined that this agreement, if executed, “would help boost the company's low tangible equity ratio which we believe is too low given Citi's asset base. Such a move would be more psychological than tangible, as no real capital would be added to Citi, but it might help ease investors' concerns over the banking space."

The deal comes with another rider. The government has asked the banking behemoth to restructure its board and ensure that the number of independent directors on its board should be in majority. Chief Executive Officer Vikram Pandit is expected to keep his job though.

New York based Citi was formed in 1998 when banking giant Citicorp and financial conglomerate Travelers Group merged. Ever since, the entity has been considered as “too big to fail”.

However the group has been reeling under the ever deepening recession.

The latest treaty between the government and Citigroup can thus be considered as an attempt to thwart the crumpling of an institution whose disintegration would send tremors throughout the globe.