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News > Deals
Citigroup buys Associates
September 6, 2000: 4:58 p.m. ET

No. 1 U.S. consumer finance company acquired in stock deal valued at $31B
By Staff Writer Tom Johnson
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NEW YORK (CNNfn) - Citigroup Inc. agreed Wednesday to purchase Associates First Capital Corp., the No. 1 U.S. consumer finance company, for about $31 billion in stock, boosting the company's international reach and providing significant depth across its already broad range of consumer products.

The transaction will is designed to provide Citigroup, already one of the world's largest financial conglomerates, with a reliable revenue and earnings stream while dramatically bolstering the New York-based company's consumer-oriented business lines.

The deal also further cements Citigroup Chairman Sanford Weill's position as perhaps the top corporate dealmaker of the modern era.

"The acquisition just fits in every facet," said Richard Bove, an analyst with Raymond James & Associates. "The most interesting thing is nobody else [but Weill] is looking at this sector. It's an absolute coup on Citigroup's part."

A powerful market leader


Irving, Texas-based Associates First, a one-time unit of Ford Motor Co. (F: Research, Estimates), offers everything from home equity loans to commercial equipment financing from its roughly 2,750 locations around the world.

Combined, the two companies will boast roughly 2,000 retail branches across the United States, giving it unparalleled reach to the American consumer. Following the transaction, Citigroup will rank as the top U.S. provider of credit cards, home equity loans and commercial leasing services.

"This is very consistent with Citigroup's strategy to build and internationalize its key businesses and also to focus on businesses it thinks it can grow at a very rapid pace," said Judah Kraushaar, an analyst with Merrill Lynch, in a note to investors. "Over the past 10 years, [Associates First] has had 23 percent compound growth in pre-tax earnings and a high growth operation ... which is consistent with Citibank's focus on acquiring high-growth targets."

graphic"I think that we have structured something that makes a heck of a lot of sense for our shareholders, makes a heck of a lot of sense for this company and continues the growth our shareholders have gotten used to over the last 10 years," Weill told investors and analysts Wednesday.

In addition to its U.S. strength, Associates First boasts more than 700,000 customers across Europe and currently ranks as the fifth-largest consumer finance company in Japan -- a region Weill openly covets as a building block for Citigroup's international operations.

Michael Ancell, an analyst with Banc of America Capital Management, said Associates First's strong position in Japan proved particularly attractive for Citigroup. (458K WAV) (458K AIF) Weill predicted Wednesday that the acquisition would improve Citigroup's international earnings by more than 40 percent from day one.

"The real key point here is what has in their Associates' sizable Japanese operations," said James Mitchell, an analyst with Putnam Lovell & Thornton. "That's a big jewel for them and Sandy Weill loves that area."

Rich price goes down easy


The agreement calls for Citigroup to exchange 0.7334 of a share for each Associates First (AFS: Research, Estimates) share. Based on Citigroup's closing price Tuesday, the deal values Associates First at $42.22 per share, a 51 percent premium over the company's closing price of $28 Tuesday.

Citigroup (C: Research, Estimates) shares shed $2.56 to close at $55 Wednesday, while Associates First jumped $10.63 to $38.63.

After the deal was announced, the Chicago Board of Options Exchange said it was investigating "unusual" trading activity in Associates First and Citigroup options, stemming from trades made by Citigroup's Salomon Smith Barney in advance of the announcement. Salomon Smith Barney confirmed it made the trades, but said they were unsolicited orders executed by employees with no knowledge of the deal.

Citigroup expects the acquisition to add at least 10 cents a share to its earnings during the first year of combined operation. That figure includes the $600 million in costs the company will likely wring from integrating the two operations.

Company executives said roughly half of the cost savings would come from integrating Associates' credit and bankcard business, which will now boast nearly $90 billion in U.S. receivables alone, with its own. The rest will come from administrative overlap in various other business lines. No layoffs are currently planned.

Associates First shareholders will own about 10 percent of Citigroup shares following the transaction, which is expected to close about the end of the year. Citigroup expects to take a one-time restructuring charge of between $600 million to $700 million related to the transaction.

graphicAnalysts said that, while Citigroup paid a rich price for Associates First, the deal should please investors because it offers an immediate financial return.

Associates grew earnings by 22 percent last year to nearly $1.5 billion, but the company's stock has traded at a relatively low price-to-earnings valuation for the financial sector because investors have ignored the industry, analysts said.

Meanwhile, Citigroup has managed to top Wall Street's estimates during each of the last two quarters, but its earnings are expected to slow significantly during the second half of the year.

"Citigroup needed a lot more earnings to hit its estimates and Sandy just found them in a dominant company," Bove said. "This will give them a foothold in the United States, which is critical because that's where the money is made."

"This is really about cutting expenses," said Diana Yates, an analyst with A.G. Edwards & Sons Inc. "You need the volume to create the synergies of scale. When you look at Citigroup, they have been looking to get bigger, particularly on the consumer side."

Weill's latest acquisition


The agreement follows a well-worn strategy of identifying undervalued companies that has helped Weill build a massive financial empire during the last 14 years.

The 66-year-old Weill -- whose well-documented rise to power at Citigroup has brought him both praise for being a crafty visionary and scorn for being a micromanager who has eliminated a stable of possible successors -- has made little secret of his desire to transform Citigroup into a global leader in every category in which it operates.

The Associates First deal fits into that plan. Weill knew the company well, having built consumer-loan firm Commercial Credit Corp. into a market leader before striking a deal to purchase a struggling Travelers Group, giving it a leading insurance operation as well.

Weill later parlayed that acquisition into a 1998 $70 billion merger with Citicorp, where he quickly assumed control. Now, Weill not only looks to dominate the consumer finance business within the United States, but in areas such as Japan, which he has been eyeing for years.

"One of the exciting things for us is really the global business," he said. "We think this really fits and will accelerate what we can do outside the United States."

Weill admitted he had watched Associates First for some time and even quietly had Citigroup purchase about 170 Associates First U.S. branches during the last two years to explore the integration of the two companies. Company officials said within a year, those branches -- which typically earn less than half the revenue Citigroup's consumer-finance branches do -- were performing on par with the company's other locations.

Weill said the agreement came together rapidly after the two parties opened negotiations in early August. Associates First's board approved the deal over the Labor Day weekend, a time when Weill joked the media "was likely to be on vacation or paying attention to [the recent merger agreement between] Credit Suisse First Boston and DLJ."

Keith W. Hughes, Associates First's 53-year-old chairman and chief executive, now joins the list of possible successors to Weill. Hughes will join Citigroup's board of directors and become a Citigroup vice chairman. Back to top

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