27 Feb 2009, the news was out. GIC was going to exchange its convertible bond to common stock at a price of $3.25 per share. Based on the opening share price of $1.67 on Friday, this will mean that GIC will have realised a lost of almost half its investment.
The first comment that came out of the article (which I could no longer retrieve because the online Straitstimes actually do now show any news article past 7 days)… exclaim that the loses have not even taken account of the further decline of share price caused by share dilution.
Well, I totally disagreed with that comment. I felt that the result would have been contrary. I thought that this was really a good piece of news for Citigroup. The fact that I am blogging about this is… I have been proven wrong by the markets.
Hmmm… makes me reminiscent about the song… "I started a joke… but I didn’t see … that the joke was on me…"
So why did I think otherwise?
It had to be a piece of good news for Citigroup. Citigroup owes our government US 6.88 billion and instead of needing to pay it back, they got GIC to convert it at double the market price at $3.25. If its on a negotiation table, it would have been a double whammy to GIC because:
- In general, institutional investors are given preferential deals because of their large amounts of investments.
- Rights offering (so far as I know) are always at a lower price then the current share price to induce shareholders’ take up.
So, by all accounts, it is only right that it should be lower than the current market price. But instead… the final price agreed upon was not lower… not even equal … but double the current price. In fact, the deal sucks so much that:
The US government’s move was conditional on Citigroup getting other major preferred shareholders to do the same. The bank also agreed to reconstitute its board. CEO Vikram Pandit will stay on.
Hmmm… and so if Citigroup has struck such a favourable deal for itself, shouldn’t the share price just go up?
It went down. All the way down.
Why? Well based on Google Finance, you can see there are possible 5 reasons: F G H I and J (dun we just love Google?)
The dollar rose to the highest in almost three years against the currencies of six major U.S. trading partners as the deepening recession and the third government bailout of Citigroup Inc. stoked demand for safety
Citigroup plunged 39 percent after the Treasury agreed to convert as much as $25 billion of preferred shares into common stock in a third rescue attempt
Well.. apparently, the bailout did not go well with the markets. This makes it so complicated. So not all bailouts are good for the markets. Still remembered the first time they announced the 800 billion bailout… share prices practically sky-rocketed. But this time.. what happened? If its a bailout, should it not be good news for the company itself?
Confused