Citigroup to buy U.K. bank
Top U.S. financial services firm to buy Schroders' investment banking arm
NEW YORK (CNNfn) - Citigroup Inc. agreed to acquire the investment banking division of Schroders PLC Tuesday for $2.21 billion, a move that will significantly improve the company's ability to compete for investment advisory and underwriting business overseas.|
The 1.36 billion pound deal will double the investment banking and equities platforms that Citigroup, the No. 1 U.S. financial-services company, holds in Europe under the umbrella of its main securities unit, Salomon Smith Barney.
"It basically provides the critical mass that we need to make us one of the top players in Europe," said Arda Nazerian, a Salomon spokeswoman.
For Schroders, the United Kingdom's leading independent merchant bank, the deal allows the company to refocus its attention on asset management and private banking services as it struggles to reverse a falling bottom line.
Separately, the London-based Schroders also said it plans to launch a private bank and hedge funds, as well as expanding its current funds management, using the proceeds from the sale.
Schroders merger: Part II
This is the second time Schroders has talked merger with a U.S. financial company after watching profits tumble in 1998 under the weight of the Asian financial crisis.
The London-based company entered unsuccessful merger talks with Beacon Group last year, even as it struggled to get its U.S. operations off the ground.
When those talks failed, Schroders ultimately turned to Salomon, which announced a commitment last year to dramatically expand its European book of business, particularly among high net worth clients.
Although boasting operations in more than 100 countries worldwide, Salomon was never mentioned in the same breath as leading investment banks overseas. But company officials said the combination of Schroders' advisory business with its equities and mergers and acquisition expertise would create a "world class" European banking operation.
Analysts weren't so bullish, but said the deal is a significant step in that direction.
"This gives them a good platform to build on, but I don't think this is the last deal you'll see," said Diana Yates, an analyst with A.G. Edwards & Sons Inc. "You'll continue to see them building on these types of transactions."
Meanwhile, Schroders officials said the company now intends to turn its attention solely to its asset management and private banking operations as part of a strategic repositioning meant to boost its bottom line, which has fallen in each of the last two years.
Schroders Chairman Win Bischoff told analysts in a conference call that establishing a stand-alone private bank and hedge fund units would cost less than one year's profits from its investment banking arm to build. Last year, its investment banking operations earned pre-tax profits of 110 million pounds.
However, Bischoff said the new unit will focus almost exclusively on Europe and Asia and not attempt to compete as a major player in the United States.
Terms of the deal
Terms of the agreement call for Schroders' shareholders to receive approximately 900 million pounds ($1.46 billion) cash, Citigroup shares and loan notes for the company's U.K. operations. The balance of the purchase price will be paid to the company in cash in exchange for the investment banking operations outside the U.K.
The book value of the assets being acquired is roughly 800 million pounds ($1.3 billion), meaning the purchase price represents a premium of 1.7 times book value.
The biggest beneficiaries will be the Schroder family heirs, who still control about 50 percent of the company's stock.
Citigroup immediately will merge Schroders' investment banking business with its own operations under a new company called Schroders Salomon Smith Barney.
James Boshart, currently the co-chief executive officer of Salomon Smith Barney Europe, and Will Samuel, Schroders' managing director of investment banking, will share the title of co-CEO of the new company.
In addition, Bischoff will become Chairman of Citigroup Europe, assuming responsibility for maintaining the company's expansive senior level investment banking client relationships.
After rising initially, Citigroup shares, which also reported higher-than-expected fourth-quarter earnings Tuesday, lost 3/8 to 57-5/8 in mid-afternoon trading.
-- Reuters contributed to this story.