Published in Portfolio
Abu Dhabi Invests $7.5 Billion in Citigroup
Published by Current on 2007-11-27
What a difference a month makes: Around this time in October, Charles O. Prince III, then the chairman and chief executive officer of Citigroup, had been invited by Abu Dhabi to participate in the biennial Festival of Thinkers, which brought together 18 Nobel laureates, and some 175 top businessmen, scholars, media executives and artists to the oil-rich Gulf state for four days of cerebrating and conviviality.
The participants got unprecedented access to top decision makers in Abu Dhabi - whose proven oil reserves are estimated to last for another 300 years - and some shrewd guests, such as Columbia University's enviro-guru Jeffrey Sachs, won timely support for their projects.
The invitation to Mr. Prince - which was first conveyed last June - came from His Highness Sheikh Nahayan Mabarak Al Nahayan, the festival's founder, who also happens to be minister of higher education and scientific research of the United Arab Emirates.
As it also happens, the 52-year-old Sheikh Nahayan is the chairman of the Abu Dhabi Group, one of the largest UAE-based group of investors involved in Asia, Europe, Africa and, of course, the Middle East - places where Citigroup has long been established. The market value of Sheikh Nahayan's investments - in banks, telecommunications, real-estate, media (he owns the majority stake in CNBC Pakistan), and financial services, among other sectors - are well beyond $10 billion, and the Oxford-educated sheikh is reportedly on the lookout for more opportunities, particularly in the United States.
But Mr. Prince did not even bother to respond to Sheikh Nahayan's invitation, which included giving the keynote address at the prestigious festival's opening. (Eventually, after some prodding, a low-level flunkey at Citigroup sent an e-mail just days before the festival began on October 21 saying that Mr. Prince had prior commitments.) It's a safe bet that had Mr. Prince traveled to Abu Dhabi for the festival, he would have been able to obtain assurances of infusion of badly needed funds to prop up his institution's sagging fiscal condition.
In fact, Abu Dhabi officials had long been considering such action in view of the fact that rising crude-oil prices were yielding the 12 members of the Organization of Petroleum Exporting states (OPEC) - of which Abu Dhabi is the current president - unprecedented income. Indeed, the six countries comprising the Gulf Cooperation Council expect that their surplus in 2007 is likely to exceed $700 billion.
And although Sheikh Nahayan's invitation to Mr. Prince had not hinted at an investment by Abu Dhabi, the complex web of governance and decision-making in the UAE - a federation of seven principalities, of which Abu Dhabi is the wealthiest because it possesses virtually all of the country's crude oil and natural gas - is such that Mr. Prince most certainly would have come away with a bonanza had he bothered to attend the Festival of Thinkers.
It's also a safe bet to say that had Mr. Prince met with Sheikh Nahayan and other members of Abu Dhabi's royalty, he might have been able to hang to his job, instead of being ignominiously removed earlier this month as head of America's biggest financial-services institution as it became clear that, not the least because of his questionable management of a global institution employing 377,000 people, Citigroup faced write-downs of more than $11 billion on dubious mortgage investments.
The story of Mr. Prince and Abu Dhabi is particularly relevant because, late Monday night, Citigroup announced that the investment arm of the Abu Dhabi government had agreed to pour $7.5 billion into the institution. This gives the government's investment arm - the Abu Dhabi Investment Authority - a 4.9 percent equity stake, slightly more than that held by Saudi Arabia's Prince Walid bin Talal.
Abu Dhabi's cash infusion at once strengthens Citigroup's capital base, which has thinned on account of costly acquisitions - such as Nikko Cordial of Japan - the sub-prime mortgage crisis, and the turmoil in the credit markets in recent weeks. ADIA manages much of Abu Dhabi's oil income, and reportedly has cash reserves of more than $1 trillion. (Earlier this year, ADIA bought a small stake in Apollo Management, a New York-based private equity firm owned by Leon Black, that has invested more than $16 billion in companies in the U.S. and elsewhere. The Abu Dhabi government - through an entity called Mubadala - owns a 7.5% stake in the Carlyle Group, while Istithmar, an arm of the Dubai government, recently bought Barneys New York. The Dubai government-controlled Borse Dubai took NASDAQ's 28 percent stake in the London Stock Exchange off its hands not long ago, gaining a 19.9 percent share of NASDAQ.)
But Citigroup is paying a heavy price for the Abu Dhabi money: The new capital will cost 11 percent annually under a complex arrangement through which ADIA will receive convertible stock in Citigroup. Citi is paying a higher interest rate than companies that borrow on the high-yield, or junk-bond, market; currently they pay about 9 percent for straight bonds, according to news reports. Typically, convertible bonds pay lower interest rates than straight bonds, although a particular bond's structure could affect the interest rate paid, analysts told media organizations this morning.
Last night's arrangement between Citigroup and Abu Dhabi, which has already been approved by the federal Reserve Bank of New York - which monitors such transactions - stipulates that the paper will be converted into common stock from March 2010 to September 2011 at a price of $31.83 to $37.24 a share. (Citi's share fell 6 percent on Monday to $29.76, pushing the yield above 7 percent - which means that the institution is already paying a steep premium for Abu Dhabi's cash infusion.)
"This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," said Sir Win Bischoff, the bank's acting chief executive officer, in a statement.
The Wall Street Journal pointed out that Abu Dhabi's investment underscores the growing role that Middle Eastern investors are taking outside their home turf. It also noted that, separately yesterday, an investment company owned by the ruler of another UAE principality, Dubai's Sheikh Mohammed bin Rashid al-Maktoum, bought a stake in Sony Corp.
The investment company, Dubai International Capital, a private-equity firm, comes under the overall supervision of Dubai Holdings, Sheikh Mohammed's umbrella organization for economic development, real-estate projects, and media acquisitions; Dubai Holdings is headed by Mohammad Abdulla Al Gergawi, who holds the title of Dubai's minister of state for cabinet affairs, but who, far more significantly, is Sheikh Mohammed's most trusted lieutenant and friend.
Sheikh Mohammed also holds the title of prime minister of the United Arab Emirates, but Dubai and Abu Dhabi regard each other as rivals, especially in the global arena where Dubai's skills at public-relations have obtained voluminous publicity for its construction, tourism, transportation and financial-services projects.
Abu Dhabi is a more conservative emirate, although far wealthier than Dubai, whose modest oil reserves are expected to disappear in less than a decade. ADIA, which has almost $1 trillion under management, this summer bought a small stake in Apollo Management LP.
"This investment reflects our confidence in Citi's potential to build shareholder value," said ADIA's Managing Director, Sheikh Ahmed Bin Zayed Al Nahyan.
As it happens, Sheikh Ahmed - one of 19 sons of the late Sheikh Zayed, who helped create UAE in 1971 from what were the British-administered Trucial States - is a friend and cousin of Sheikh Nahayan. Moreover, Sheikh Nahayan's father, Sheikh Mabarak bin Mohammed Al Nahayan, served as an influential minister in Sheikh Zayed's cabinet, and is widely regarded as one of the most revered figures in the Gulf.
In this part of the world, such relationships and reputations matter. Indeed, one of Sheikh Nahayan's brothers leads Abu Dhabi's national carrier, Etihad Airways. One of Sheikh Mohammed's brothers heads Dubai's highly successful Emirates Airline Group.
Manners and protocol also matter in this part of the world. The fact that Chuck Prince didn't bother to respond to a personal invitation from Sheikh Nahayan may or may not have saved his own job, but it certainly raised a question in the minds of UAE decision-makers whether a man who neglected to observe the most elementary etiquette of professional life could be trusted to lead a global institution, let alone rescue it from financial distress.
Lesson for CEO's: When Abu Dhabi calls, respond immediately.
Senior Writer and Global-Affairs Columnist