CITIGROUP undercut rivals this week to win the biggest block trade in Australia in seven years, only to see the deal unravel and leave the US bank with unsold stock on its books.
The firm outbid other rivals on a block trade in property firm Goodman Group by China Investment Corporation (CIC) with a discount of between 1.4 to 1.5 per cent below Tuesday’s (Dec 3) closing price, according to sources familiar with the matter. At least four other banks invited to pitch by CIC to offload the stake had teased a 3.5 to 4 per cent discount, the sources said, asking not to be named as they were not authorised to speak publicly.
With Citigroup unable to sell the entire block, the bank chalked up an A$27 million (S$23 million) loss after putting A$1.9 billion of its own money on the line. The lender was left holding 27 million Goodman shares, more than the 23.4 million it sold in the deal that it had fully underwritten, leaving it exposed to further potential losses.
The tribulations for Citigroup underscore the risks of handling large stock sales in a fiercely competitive part of the Asia Pacific. Global banks such as UBS Group and Goldman Sachs battle with strong domestic players such as Barrenjoey in an investment banking market that’s handed financial firms about US$1.8 billion in fees in the first nine months of this year, according to data from the London Stock Exchange Group.
“The recent sell downs show you how intense the competition is around winning mandates,” said Matthew Haupt, a portfolio manager at Wilson Asset Management in Sydney. Banks frequently rely on “tight discounts to try to win mandates for vendor sell downs – this makes for bad outcomes for us, they tend to trade badly, such as Goodman”, Haupt said.
Winning the sale mandate vaulted Citigroup from 12th place in the third quarter to first this week, according to data compiled by Bloomberg on equity and rights offerings in Australia and New Zealand. That ranking of more than 60 firms has been exclusively led annually by either Goldman Sachs or UBS over the past decade, the data show.
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The surprise flop comes at a crucial time of the year for bankers as senior management discuss compensation payments and leaves Citigroup dealmakers with a slim chance of recovering lost revenue before the end of 2024.
The Goodman deal got signed off by Achintya Mangla, the firm’s head of financing for investment banking and a key deputy to chief executive officer Jane Fraser, one of the sources said. He recently joined Citigroup after a more than 22-year stint at JPMorgan, where he helped run global investment banking.
Equity capital markets underwriting in Australia earned banks about US$392 million in the first nine months of this year, accounting for 22 per cent of total investment banking income, according to the London Stock Exchange Group.
Also this week, other banks handled large block trades with no discounts. The founders of radiology firm Pro Medicus sold about A$513 million worth of shares, while Auckland City Council sold its stake in Auckland International Airport at the same price the shares had closed on Tuesday.
A spokesperson for Citigroup declined to comment on Thursday.
Prospective underwriters were approached on Tuesday by CIC and given just a handful of hours that morning to assemble their offers, according to two sources familiar with the process. Citigroup counts CIC, China’s US$1.3 trillion sovereign wealth fund, as a key client, one of the sources said. CIC owned 149.9 million Goodman shares before the latest block sale, data compiled by Bloomberg show.
The risk on a deal like this is not giving investors such as Haupt at Wilson Asset Management enough incentive to buy into the deal. That meant staying out on the Goodman block this week, the biggest since Shell’s selldown of Woodside Energy Group in 2017.
“We need to make money on these deals to take the risk, pricing them so tight doesn’t help us,” Haupt said. BLOOMBERG
