We saw the news this morning that Citigroup (C) had agreed to buy a Spanish highway operating firm for up to $10 billion, including assumed debt, we just knew that someone out there would freak out and claim it to be an outrageous use of the bailout money.
That award goes to Glenn Hall at TheStreet.com, who at 9:07 AM declared the news to be “Today’s Outrage”.
Treasury Secretary Henry Paulson gives the U.S. bank $45 billion in taxpayer money to keep it afloat and get it to pump some money into the emaciated U.S. lending system and what does Citi do?
Buy a Spanish highway operator.
Yes, you heard right. A Citigroup infrastructure fund agreed to take over Spain’s Itinere from Sacyr Vallehermoso in a deal valued at about $10 billion, which includes about $6.3 billion in debt that Citi will take on.
Just what Citi needs: more debt.
Of course, Citi officials will tell us this is good debt, unlike the $306 billion in risky assets U.S. regulators agreed to backstop last week as part of a $20 billion taxpayer-funded cash injection to shore up the bank. That’s on top of the $25 billion in federal bailout money Citi received earlier this year.
Oy, where to start. First the obvious: This is part of what global financial behemoths do. Deals. Buying and selling. Since the taxpayer has become such an important investor in Citi, we want them to succeed. Neither Glenn nor we have read the exact terms of the deal, so we can’t easily judge this from a pure investment standpoint, but at this point, we have no particular reason to think it’s a bad deal. Let’s just assume it’s neutral.
Second, this is a specific Citigroup infrastructure fund making doing this deal. The fund has its own book, its own cash, its own debt, its own assets, etc. Does Glenn think that Citi, when given its latest cash injection, plowed that cash into its infrastructure fund?
Third, the deal is tiny compared to Citi as a whole. Sure, the company’s market cap is down to $40 billion, but we’re talking about a firm with $3.2 trillion in assets. A $10 billion deal, and another $6.3 billion in assumed debt is pretty trivial.
Fourth, the article confuses terms when it says “Citi officials will tell us this is good debt, unlike the $306 billion in risky assets U.S. regulators agreed to backstop last week as part of a $20 billion taxpayer-funded cash injection to shore up the bank.” Now see, Citi is taking on $6.3 billion in debt that it will have to pay back. That’s a liability. The $306 billion in risky assets being backstopped, are, well, assets. They may be debt-based securities, but that $306 billion is on the other side of the balance sheet than the assumed $6.3 billion that the Citi infrastructure fund is taking on. Perhaps the reason the point in the article is muddled is that the purpose is to stoke outrage, rather than to explain the situation. We’re glad to help.
Bottom line: A Citi infrastructure fund — a fund that deals in infrastructure assets — bought a highway company in Spain. It’s not a huge deal either way, especially set against Citi’s gigantic overall balance sheet. But because it’s Citi, of course someone was going to bite on it and ask whether taxpayer money should be going to Spanish roads.
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