ValueAct takes $1.2bn stake in Citigroup

Bloomberg

The activist fund ValueAct Capital Management has amassed a $1.2 billion stake in Citigroup Inc., arguing that the bank long seen as trailing its sector is positioned for success by providing the “plumbing” multinational corporations need to operate.
The San Francisco-based hedge fund run by Jeff Ubben, which disclosed a $75 million stake in the bank in February, has been building those holdings over the past four or five months, according to a quarterly investor letter obtained by Bloomberg. ValueAct said it’s continuing to add to its position.
“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,” ValueAct said
in the letter.
The hedge fund said it believes the bank has about $50 billion in free cash it could easily return to shareholders over the next two years in dividends or share buybacks without affecting its ability to achieve its earnings growth targets. Beyond that, the New York-based bank has the ability to return $18 billion to $20 billion of capital a year, ValueAct said.
“We have been having constructive conversations with ValueAct and welcome them as investors,” Jennifer Lowney, a Citigroup spokeswoman, said in an emailed statement. A representative for ValueAct declined to comment.
Capital payouts by major US banks are subject to their passage of annual stress tests by the Federal Reserve, which have forced them to build large buffers in recent years to ensure their ability to weather another financial crisis.
Citigroup rose as much as 2 percent in late trading after the Wall Street Journal reported the size of ValueAct’s stake.
Possible Earnings
ValueAct argues the company is misunderstood and that investors are too focused on short-term quarterly volatility rather than the firm’s long-term prospects. The bank could generate a return of 15 percent or more on tangible common equity and deliver earnings per share of at least $10 by 2020, or more than double the earnings per share produced last year, according to ValueAct.
That’s largely the result of restructuring efforts that aren’t well understood by the market, ValueAct said.
“Over the last 10 years Citigroup has exited over 20 global consumer markets and shed nearly $800 billion in non-core assets, all while maintaining scale and investing heavily into its attractive institutional franchises,” ValueAct said. “Citigroup is now growing in a sustainable fashion, is less exposed to both earnings volatility and risk of capital impairment, and is better capitalised and more securely funded than at any point in our lifetime.”