How Citigroup Benefits From The Sale of OneMain

-5.22%
Downside
58.63
Market
55.57
Trefis
C: Citigroup logo
C
Citigroup

Earlier this week, Citigroup (NYSE:C) finalized a deal to sell its consumer lending unit, OneMain Financial, to Springleaf Holdings for a neat sum of $4.25 billion. [1] The decision marks an end to the year-long dual-track process undertaken by the globally diversified banking group towards divesting the business, with plans of an initial public offering (IPO) moving in parallel with talks for an outright sale. [2] Notably, the deal values OneMain only slightly higher than the initial estimate of $4 billion despite the fact that Springleaf will achieve significant cost synergies from the merger of its operations with the newly acquired business. Citigroup’s advisory arm handled the deal on the bank’s behalf, whereas Springleaf was advised by Bank of America (NYSE:BAC), Barclays (NYSE:BCS), Credit Suisse (NYSE:CS) and Goldman Sachs (NYSE:GS).

While the deal will make Springleaf the single biggest sub-prime lender in the country, Citigroup stands to gain a lot from the disposal of what is its most profitable business in terms of return on assets (RoA). The cash generated from the sale will allow the bank to retire some of its debt over the coming months – in turn bringing in additional savings on interest expense. The deal and the subsequent interest savings should boost Citigroup’s pre-tax profit figure for the year by $1 billion. The sale also means that Citigroup is no longer a player in the sub-prime lending industry – something that should marginally reduce regulatory scrutiny on the bank in the future. More importantly, the disposal is an important step towards the eventual divestment of all of Citigroup’s non-core operations as OneMain represents roughly 10% of Citi Holdings’ total assets at the end of 2014.

We have a $56 price estimate for Citigroup’s stock, which is roughly 10% ahead of the current market price.

Relevant Articles
  1. Rising Only Half the S&P’s Gain In 2023, Where Is Citigroup Stock Headed?
  2. What To Expect From Citigroup Stock In Q3?
  3. Citigroup Stock Is Trading Below Its Intrinsic Value
  4. Citigroup Stock Is Trading Below Its Intrinsic Value
  5. Citigroup Stock Has Growth Potential
  6. Is Citigroup Stock Fairly Priced?

See our full analysis for Citigroup


Citigroup’s Citi Holdings division, often termed the “bad bank,” was created in 2009 to house all the poor-performing and non-core assets that the group sought to dispose of over time. Since then, the bank has made significant progress managing this division, as it cut down total assets from more than $800 billion at the peak of the economic crisis (32% of Citigroup’s total assets) to $98 billion by the end of Q4 2014 (around 5% of total assets). OneMain Financial is a sizable part of Citi Holdings with roughly $9 billion in assets.

OneMain Financial is one of the largest providers of installment loans in the country, and hands out between $3,000 and $15,000 in personal loans to people with credit ratings which are below average. One of the banking group’s oldest operating units, it came into existence in 1912 as Commercial Credit, and grew through several key acquisitions to become CitiFinancial – the leading community-based lender in North America prior to the economic downturn of 2008. [3] But the recession and the subsequent focus on cutting down costs by exiting non-core operations saw Citigroup renaming the division OneMain Financial in 2011 and moving it to Citi Holdings. The unit was almost sold in late 2011, but difficulty securing financing for the deal forced Citigroup to delay its plans. [4]

Plans to dispose of the unit were revived early last year, when Citigroup saw interest for OneMain from several suitors. [5] Within months, CEO Michael Corbat announced that the divestment will be completed by the end of Q1 2015. [2] While the unit was up for grabs for around $2 billion in 2011, the considerably improved market conditions coupled with the unit’s much cleaner balance sheet now helped it receive a $4.25 billion value from Springleaf. The deal is expected to close by the third quarter of 2015.

Besides its one-time positive impact on Citigroup’s profit figures, the deal will help Citigroup reduce the size of assets housed under Citi Holdings to under $90 billion. The chart below shows the average size of assets for Citi Holdings over the years along with our forecast.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. Citi to Sell OneMain Financial to Springleaf, Citigroup Press Releases, Mar 3 2015 []
  2. Citigroup CEO Says Bank Could Sell or Spin Off OneMain, Wall Street Journal, May 29 2014 [] []
  3. Our History, OneMain Financial Website []
  4. Citigroup Said to Halt Talks on Sale of Its OneMain Consumer Lending Unit, Bloomberg, Jan 6 2012 []
  5. Exclusive: Fortress, others eye Citi’s OneMain consumer finance unit, Reuters, Feb 21 2014 []