RPT-BREAKINGVIEWS-Citi finally bites the Banamex bullet

By Stephen Gandel

NEW YORK, Sept 25 (Reuters Breakingviews) - A sign of good leadership is knowing when to seek help. Citigroup C.N CEO Jane Fraser’s decision to bring in a new backer to jumpstart a long-running Banamex divestiture process fits the bill. The deal to sell a 25% stake valuing the Mexican retail lender at $9.2 billion comes at a price, but it also represents a big step toward salvaging a quarter-century misadventure south of the border.

Citi bought Banamex in 2001, a $12.5 billion acquisition championed by then-Vice Chair Robert Rubin, who had previously orchestrated a bailout of Mexico's financial system while serving as U.S. Treasury secretary. It became another piece of the mega-bank's excessive sprawl, which Fraser sought to unwind four years ago.

The exit, however, has been a slog. Most of Banamex's peers expressed little interest, and when Citi looked poised to sell it for as much as $7 billion in 2023, the local buyer backed out over government demands. A planned initial public offering by this year also sputtered, including because of U.S. tariffs. The deal unveiled on Wednesday with Mexican billionaire Fernando Chico Pardo isn’t expected to be sealed until mid-2026, further delaying any public listing.

Such cornerstone investors are more common in other parts of the world, but have worked out well. For example, a recent study of more than 800 IPOs in India found that companies that first sell off a big slug tend to raise more money at higher valuations than similar non-anchored market debutantes. This at least provides a hopeful sign that Citi might recoup some of its cost.

Pardo is buying his portion of Banamex at 80% of its book value. To make back the discount, Citi would need to sell its remaining stake for about $9 billion. Domestic rivals trade at an average of 1.4 times assets minus liabilities, a multiple that would peg Banamex at $13 billion and Citi’s remaining stake at nearly $10 billion.

More importantly, the Pardo partnership puts Fraser one step closer to simplifying and righting a Citi still struggling to fully recover from a government rescue more than a decade ago. The bank is slowly getting on the right track, however. Its shares recently topped $100 apiece for the first time since the global financial crisis and are nearly trading at book value. A little support in Mexico and beyond will go a long way.

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CONTEXT NEWS

Citigroup said on September 24 that it had agreed to sell a 25% stake in its Mexican retail bank Grupo Financiero Banamex to billionaire Fernando Chico Pardo, who will become chairman of Banamex.

As part of the deal, which values Banamex at 0.8 times book value, Citi said it would take a $726 million goodwill impairment charge in the third quarter.

Citi first said it intended to divest Banamex in 2021, and said two years later that it would spin it off through an initial public offering instead of an outright sale. The proposed IPO will be guided by market conditions and other factors, Citi said.