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Citigroup to spin Travelers
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December 19, 2001: 4:35 p.m. ET
Property insurer's IPO expected to be blockbuster, seen raising up to $5B.
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NEW YORK (CNN/Money) - Citigroup set plans Wednesday to sell up to 20 percent of its Travelers insurance unit in an initial public offering which some predict could raise up to $5 billion.
The move marks the first time in years that New York-based Citigroup, with banking, brokerage and insurance operations in 100-plus countries, will divest a major business, after creating a financial services supermarket from a string of big acquisitions in consumer and corporate banking.
Citigroup's move also taps investor interest in property insurers, which have raised billions of dollars from selling stock since the deadly Sept. 11 attacks on the United States.
"The commercial property-casualty business makes the least sense in Citigroup's consolidated group of companies because it's the most difficult to cross-sell," said financial industry analyst Jonathan Balkind at Fox-Pitt Kelton. "It's a lumpy, lower return-on-equity business that has a weaker growth rate than the rest of its businesses."
Shares of Citigroup (C: up $1.90 to $50.00, Research, Estimates) jumped nearly 4 percent Wednesday.
The first part of the initial public offering will come in the first quarter of 2002, with the spinoff of the remainder of Travelers to Citigroup shareholders to be completed by the end of next year. Robert Lipp, a Citigroup director, will be chairman and CEO of Travelers.
Citigroup could raise from $4 billion to $5 billion in the IPO, said analyst Judah Kraushaar of Merrill Lynch.
The Travelers Property Casualty (TAP) business represents about 8 percent to 10 percent of Citigroup's earnings but is a slow-growing unit within the company's fold. TAP is expected to only increase earnings by 7 percent to 8 percent over time, Kraushaar said.
The IPO/spinoff is a way for Citigroup to exit the business and free itself up for expansion opportunities.
"We would not be surprised to see $4-5 billion in proceeds from this transaction, which may be used for buybacks or, more likely, to support acquisitions of better growth/higher margin businesses," Kraushaar said in a research note.
The effect on 2002 earnings will be immaterial after Citi reinvests the proceeds but long-term earnings per share are seen growing, said Kraushaar, who reiterated a "strong buy" rating on Citigroup.
The IPO will likely hit the "ten-figure range" and could raise more than $1 billion, said John Fitzgibbon, editor of IPO Desktop. The offering will likely be a blockbuster as it follows the strong success of Prudential Financial Inc. (PRU: up $0.20 to $30.15, Research, Estimates), which raised $3 billion on Dec. 13. The insurer rose nearly 7 percent in its debut on the New York Stock Exchange and has since gained nearly 9 percent from its $27.50 IPO price.
Citigroup is not expected to file its offering with the Securities and Exchange Commission until mid-January.
The financial behemoth will likely turn to unit Salomon Smith Barney to serve as lead book runner on the IPO. Salomon may share the top underwriting honors with Credit Suisse First Boston since the two have successfully worked on IPOs together before, Fitzgibbon said.
CSFB and Salomon Smith Barney served as co-lead underwriters on the mammoth $8.68 billion IPO from Kraft Foods Inc. (KFT: up $0.18 to $33.98, Research, Estimates) last summer.
Salomon declined to comment. Both Citigroup and CSFB could not be reached for comment.
Citi and Travelers plan to enter management agreements in which Citigroup will provide investment advisory and other services to Travelers, while Citigroup continues to sell Travelers insurance products.
"In addition to enabling Citigroup to focus its resources more fully on higher growth areas of global financial services, this spinoff creates a stand-alone, leading publicly owned property-casualty company," Citigroup Chairman Sanford Weill said in a statement.
As part of the split, Travelers is expected to declare a $1 billion dividend payable to Citigroup over the course of 2002, the company said.
The move comes as insurers are coping with huge claims related to the Sept. 11 terrorist attacks. Analysts have generally been positive on insurers, though, noting that higher premiums would help make up for hefty payouts. A number of new insurance companies have been created in the wake of the attacks.
Weill has been searching for ways to boost Citigroup's stock, which trades lower than competitors such as American International Group (AIG: Research, Estimates) and American Express (AXP: Research, Estimates), the Wall Street Journal reported Wednesday.
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The spinoff of Travelers also marks a change for Weill, known for his aggressive acquisition strategy -- as evidenced by Citigroup's purchase earlier this year of Grupo Financiero Banamex Accival, Mexico's biggest bank. Last year, the company bought consumer finance firm Associates First Capital Corp.
It was Weill who bought Travelers several years ago and then merged his Travelers Group Inc. with Citicorp in 1998 to become Citigroup.
Nevertheless, Travelers has remained in the background relative to the company's other units such as investment bank Salomon Smith Barney and consumer lending, with some on Wall Street saying the unit was hurting Citigroup's stock. 
Reuters contributed to this report.
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