Activist ValueAct Takes $1.2B Stake in Citigroup

Citigroup Inc. (C) is misunderstood and therefore undervalued by the market, according to one activist fund. Value Capital Management has taken a $1.2 billion stake in the New York City-based bank, expecting the financial institution to return more than $50 billion to investors over the next two years. (See also: Citi, Wells’ Underperformance Is Opportunity: UBS.)

While Citigroup, the fourth-largest bank in the U.S. by total assets, has long been viewed as trailing its peers in the post-2008 financial crisis era, San Francisco-based ValueAct expects its strength as a service provider to large corporate clients to help make up for lost ground, according to The Wall Street Journal, which reviewed a letter sent to the fund's investors. ValueAct's stake of roughly 0.7% of the Big Bank reflects a market value of $175 billion and was amassed over the most recent four to five months. 

ValueAct will continue to boost its Citigroup holding "opportunistically," according to the WSJ. In February, the hedge fund run by Jeff Ubben disclosed a $75 million stake in the bank. "Based on the share price at which we have been able to accumulate our stake in the company, we do not believe the market views Citigroup in the same way we do," wrote ValueAct. Closing up about 0.8% on Monday at $68.50, Citigroup reflects a near 8% decline year-to-date (YTD) and a 13.7% gain over the most recent 12 months, compared to the S&P 500's flat trading and 11.4% return over the same respective periods. 

ValueAct: Despite Volatility, Citigroup Is Better Than Ever

ValueAct's quarterly letter to investors does not directly call for significant strategic changes, but indicates that Citigroup could return about $50 billion in free cash to shareholders via buybacks and dividends without affecting its ability to achieve its earnings growth targets. The hedge fund sees potential for Citigroup to return an additional $18 billion to $20 billion of capital a year. "We have been having constructive conversations with ValueAct and welcome them as investors,” said a Citigroup spokesperson. 

ValueAct argued that Citigroup's restructuring efforts have been overlooked by the market, while progress has gone largely unnoticed. The hedge fund noted that over the past decade, Citigroup has exited more than 20 global consumer markets and shed about $800 billion in non-core assets. Meanwhile, the firm has maintained its scale and doubled down on an "attractive institutional franchise," wrote ValueAct. Yet investors have been too focused on short-term volatility, despite the bank being "better capitalized and more securely funded than at any point in our lifetime."

“Some of our most successful investments have been made in situations where other investors cannot seem to shed their past perceptions of a company’s prospects,” read the ValueAct letter. “This was the case with Microsoft Corp. (MSFT) and we believe it is also the case with Citigroup, which has long been regarded as the laggard of the large universal banks.”

The hedge fund said Citigroup could post earnings per share (EPS) growth of 100% or more from 2017 to $10 by 2020, while the stock could return 15% or more on tangible common equity. (See also: 4 Bank Stocks to Outperform in 2018: Oppenheimer.)

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