Thursday, June 10, 2010

Why Pershing Square's Bill Ackman Bought 146.5 Million Citigroup Shares (C)

Early pre-market the stock is trading up a nickel at $3.92.
From The
Editor's Note: The Street ran an article called Five Reasons to Love Bank Stocks on May 28, highlighting the future benefit of past tax losses as a reason to invest in bank stocks. Bill Ackman is voicing a similar opinion in the article that follows.
Citigroup(C) shares got a boost Wednesday as a bullish letter to investors from hedge fund giant Bill Ackman made the rounds among investors.

Ackman, head of hedge fund Pershing Square Capital Management, announced at a recent investor conference that he had bought roughly 150 million shares of Citigroup, but did not explain the reason for his investment in detail. In his letter to investors that surfaced Wednesday, Ackman cites "two important elements of Citi that the market does not fully appreciate" and puts the investment at 146.5 million shares.
Pershing Square officials declined comment for this article.
>>>See Ackman's Letter
The first point Ackman makes is that Citigroup effectively has $21 billion in net deferred taxes on its balance sheet. In other words, Citigroup lost so much money in the past that it likely won't be paying taxes for several years. As TheStreet pointed out in a recent article, Citigroup will not pay taxes on its next $131 billion in earnings. It is expected to earn $8 billion in 2010. Other banks, including Bank of America(BAC) and Morgan Stanley(MS), will see similar benefits, though not so dramatic.

Ackman also states that Citigroup has "$24 billion to $30 billion of excess capital supporting the wind-down of Citi Holdings that will be available to be returned to shareholders as these assets are liquidated."
Ackman also sounds bullish on big banks in general in his letter, calling it "a favorable moment in history to be a large scale financial institution." He cites "the combination of extremely low-cost funds and deposits, relatively high spreads on new loans, more conservative lending standards, and a less competitive lending environment.">>>MORE
Market Folly had the story last week:
Why Bill Ackman Bought Citigroup (C)

Last week we detailed a summary of investment ideas from various hedge fund managers at the Ira Sohn Conference. Pershing Square's Bill Ackman was one of the many speakers and though he ran out of time in his presentation, he did briefly mention he had purchased 150 million shares of Citigroup (C). Ackman was then recently interviewed by Yahoo TechTicker to talk about Christine Richard's new book which he is the subject of, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. However, TechTicker also had the chance to ask him about his new purchase.

Ackman was actually surprised when he took this stake because back in the throngs of the crisis he could never see himself owning a financial company only twelve months later. Keep in mind that the US government recently announced the sale of 1.5 billion shares of Citigroup (C) and they have plenty more to sell. This fact has acted as somewhat of an overhang on the stock. But Ackman certainly isn't bashful and dove right in.

While Ackman fully admits that Citigroup is still working through their problems, he sees them as one of the "best capitalized banks" out there currently due to the conversion of the government's preferred stake. Elaborating on this thesis, Ackman thinks the zero rate interest policy is benefiting the bank as they are earning very attractive spreads....MORE
He also links to the Tech Ticker video: