At the very beginning of 2022, Citigroup (C 0.26%) announced its plans to shed its consumer, small business, and middle-market banking operations within its subsidiary Citibanamex, which also happens to be one of the largest banks in Mexico.
The sale was never going to be easy, but it aligned with Citigroup's transformation plan, which involved selling international consumer banking franchises in order to simplify the bank.
The sale of Citibanamex would also free up significant capital the bank could use to further carry out its transformation and to repurchase stock, ideally while the bank is trading at a beaten-down valuation. Nearly one year after Citigroup announced its intention to sell the unit, let's take a look at how things are going.
A complex transaction
We know from information provided by Citigroup last year that in 2021 the bank allocated about $4 billion of tangible common equity to the parts of Citibanamex that it planned to sell and made $1.1 billion in profits that year. That translates to a stellar 27.5% return on tangible common equity in 2021.
Image source: Getty Images.
But with the bank moving away from international consumer banking, they likely felt that it didn't make sense to keep its consumer banking operations in Mexico, despite its high profitability. Plus, they also probably felt like they could get a pretty good price on the unit.
The transaction is complex because Citibanamex also has a large corporate and institutional business that Citigroup is planning to keep, which means it is essentially splitting the operation into two parts. Even though they are separate divisions, I would imagine this is no small task.
Additionally, because of the institution's importance to Mexico, Citigroup has likely been working very closely with the Mexican government on the transaction. Citigroup also said in its first announcement about Citibanamex that it would also consider a public market alternative, which likely referred to spinning out the unit, but it seems like the preferred plan has been to sell the unit.
The bidding process
Reports over the last year suggest that Citibanamex has had strong interest from buyers, which makes sense not only because of its profitability but also because a buyer can instantly gain a sizable market share in Mexico with the purchase. Latin America is an incredibly attractive and growing banking market right now, and Mexico is one of the wealthier countries in the region.
But the process has not come without its challenges. For instance, in mid-2022, Mexican President Andrés Manuel López Obrador (AMLO) announced four conditions in relation to the sale of Citibanamex:
- It must be funded by Mexican capital.
- Potential buyers must be current on their tax payments.
- Citibanamex's art collection must stay in Mexico.
- There will be no major layoffs.
I can only comment so much on some of these, but the big one that stands out in my mind is no major layoffs because that's how a lot of acquirers create real value from an acquisition: by cutting a significant portion of the target's cost base, which tends to involve significant layoffs.
As a result, there have been reports in recent months of buyers dropping out of the bidding process. Still, Citigroup's CEO Jane Fraser maintained on the bank's recent earnings call that "we're in active dialogue" with buyers and that the bank is "extremely pleased with the progress that we're making."
Even more interesting is a report from the Mexican national newspaper El Financiero that says the sole bidder left for Citibanamex is the billionaire Germán Larrea Mota-Velasco, who is also the CEO of Mexico's largest mining operator, Grupo México. The article also reports that Mota-Velasco is offering $11 billion for the unit but is waiting for Citigroup to agree to certain conditions.
Would Citigroup take the offer?
If the report from El Financiero is true, I do believe Citigroup would take this offer. Citigroup first purchased Citibanamex in 2001 for $12.5 billion, but remember, Citigroup is currently only selling one -- albeit large -- portion of the bank.
In addition, the $11 billion purchase price would value the parts that Citibanamex is selling at 275% of its tangible book value, or net worth, which is usually a very good valuation as far as bank deals go.
It's in Citigroup's best interest to get this done as soon as possible and unlock capital. This would likely ease the bank's regulatory capital burden. Shareholders are also fed up with the bank's underperformance at this point and would like to see the bank resume share repurchases as soon as possible, especially given its discounted valuation.
