Rochdale Securities analyst Richard Bove says a lot of things we don’t agree with, but his angry diatribe on Citi’s decision to sell Phibro — its energy trading arm — to Occidental Petroleum for a rather lacklustre price of $450-500m, hits a few regulatory issues directly on the head.
Here’s the start of Bove’s 20-page note, published on Sunday night and entitled “Socialism in Action”:
Citigroup sold its Phibro proprietary trading business to Occidental Petroleum (OXY/$79.54/NR) for what appears to be the unusually low price of $250 million (private sources claim $450 million). This sale raises the question as to whether the CEO and Board of Citigroup are willing to act in the interest of the company’s shareholders. It also sets the pattern of what may prove to be a series of similar actions by other banks reacting to the government takeover of the banking industry.
The reported numbers concerning Phibro according to the Wall Street Journal are as follows: a) 2008 revenues of $667 million; b) average annual earnings in the past 5 years $372 million; and c) sale price $250 million (possibly $450 million). In essence, this business was sold for a price that is less than its average net income over the past five years, if the Journal numbers are correct.
It is not unrealistic to indicate that no company sells one of its divisions for less than its income. Thus, this sale was not in the interest of Citigroup shareholders. Stated differently, Citigroup would have been expected to generate $250 million from its Phibro division in 8 months or by May next year if it were not sold.
If the sale was not in the interests of shareholders, then why do it, you may ask?
Nearly every newspaper (the FT included) cites government pressures on Citi –which was bailed out by the US state last year.
As you may have guessed, it’s a theme also picked up by Bove:
There appear to be two reasons why this action was taken. First, and by far the most important, the government has indicated that using bank capital for high risk ventures — i.e., proprietary trading, is inappropriate. Second, Phibro’s head trader apparently earned just under $100 million in 2008, and the government may have found this to be objectionable.
I find it ironic that the buyer of the business was Occidental Petroleum. This company was founded by the now deceased Armand Hammer. Dr. Hammer has been repeatedly cited in history texts as a key friend of both Lenin and Stalin (see Edvard Radzinsky’s Stalin). Muammar al‐ Gaddafi, Libya’s dictator, called Hammer and Occidental, Libya’s best friends in the United States (see Geoff Simons’ Libya: The Struggle for Survival for a sense of the relationship. Thus, the company has a long history of assisting governments that interfere in the private sector — although this may not be the company’s philosophy today.
Weird Hall-rant aside, Bove is highlighting something important here — namely that the regulatory environment for banks, and the government’s tolerance for the high-risk, high-reward model of years past, is changing and not necessarily in what some bank-shareholders see as their interests.
Here’s Bove’s rather succinct conclusion:
Citigroup is, in many respects, the template on which American banking will be fashioned in the future. This may not be positive.
Related links:
Why Paul Volcker HEARTS Citigroup’s Phibro sale – WSJ
10 things you didn’t know about Phibro and Andrew Hall – WSJ
Citi can’t keep Phibro – Felix Salmon