Thursday, December 3, 2009

The hits just keep comin' for Abu Dhabi (C)

Dang.  Can't be a fun time to work at ADIA, or Abu Dhabi Investment Authority:

Last week was filled with headlines over Dubai's potential default on it's debt, which would necessitate a rescue by "rich uncle" neighbor, Abu Dhabi.  As expected, Abu Dhabi did indeed say they would step in with at least some financial assistance.

Today, Wall Street is talking about a 2007 deal that ADIA struck with Citigroup, which looks to be truly disastrous.

From the WSJ:

"Because of an investment deal struck two years ago, early in the financial crisis, the United Arab Emirates' sovereign fund will soon start purchasing $7.5 billion in Citigroup shares at $31.83 apiece, even though the New York bank's stock closed at $4.10."

From November 2007, reported by the NYTimes:

The fund, the Abu Dhabi Investment Authority, has agreed to buy a 4.9 percent equity stake in a complex transaction that has been approved by federal regulators. It will have no role in the management or governance of Citigroup, nor any presence on Citigroup’s board.
A.D.I.A. will receive convertible stock in Citigroup, with an 11 percent yield, that must be converted into common stock at a price of $31.83 to $37.24 a share from March 2010 to September 2011.

Did you happens to spot the uh, thorny part of that agreement?  ADIA agreed to convert this stake into common stock at a minimum of $31.84 per share, which is 678% above current levels.

Hindsight is 20-20 of course, so people should ease up on the criticism.  Looking back, how might ADIA have avoided this?  In my career, when I've been pitched a deal, I always think about it from the perspective, "Do I want The other side of their trade?"  When I've been approached by some i-banker pitching some questionable equity deal, and I've never done a single commission with him, I wonder "how many people said NO before you got to me?"  The answer is usually a lot.

In ADIA's case, the one thing that might have raised eyebrows was that Citi was raising money at an 11% annual rate, a CRIPPLING cost of capital for a bank.  Knowing that they'd eventually have to own common stock, they should probably structured the deal at a discount to the (then) share price of $28.

Copyright 2009 AlphaNinja


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