Citigroup (C) Sheds OneMain for $4.25B to Springleaf – Analyst Blog

Citigroup Inc. C announced the sale of its consumer-lending business OneMain Financial to Springleaf Holdings, LLC LEAF in a cash deal valued at $4.25 billion. The agreement, which is subject to regulatory approval, is anticipated to close in third-quarter 2015.

With over 2.5 million customers and about 2,000 branches, the combined entity of Springleaf-OneMain will stand as the largest subprime lender in the U.S. The consolidation of 200 branches is expected in mid-2016 and Springleaf anticipates the deal to be accretive to its after-tax earnings in 2015.

The proceeds from the deal will be used partly by Citigroup to pay off certain funds, which were supporting Citi Holdings. Moreover, the withdrawal of funds along with the sale is anticipated to increase earnings before income taxes by about $1 billion.

CEO Michael Corbat had previously revealed that the company initiated the process of selling and was weighing its options including divestiture to a private equity firm through public listing or a combination of both by the end of 2014, or early 2015.

Notably, Merrill Lynch, a unit of Bank of America Corp. BAC, The Goldman Sachs Group, Inc. GS, Barclays PLC BCS and Credit Suisse Group AG CS acted as advisors for Springleaf, while Citigroup’s Institutional Clients Group unit acted its advisor.

After-Effects of the Deal

Springleaf CEO Jay Levine commented, “This is a transformational transaction, bringing together two best-in-class personal finance businesses to create a combined company that we believe is financially strong and optimized for growth.”

Levine will head the combined company while Mary McDowell will continue as OneMain’s CEO. After the completion of the deal, the combined company will be running from Springleaf’s executive office in Connecticut.

Why Vend OneMain Financial?

OneMain Financial – part of the former CitiFinancial – is the biggest operating unit of Citi Holdings with around 1,200 branches and focuses primarily on subprime loans. As Citigroup was hit hard by the subprime mortgage crisis, the plan to sell this unit is basically a precautionary measure to deal with any further crisis.

The company has been taking several restructuring initiatives to make it as much a problem-asset free as possible. On the other hand, the banking behemoth intends to focus more on core operations.

Corbat stated that the subprime business no longer is a strategic fit for the changed business track of Citigroup. He also mentioned that Citigroup previously explored the option to vend OneMain Financial, but did not get the right bid.

Is It the Right Move?  

Amid troubled tides when Citigroup is encountering issues from various fronts including the ongoing investigations related to the Mexican fraud and the Federal Reserve’s rejection of its 2014 capital plan, the completion of the deal will give the company some financial flexibility.

The company has already been shedding distressed assets from its Citi Holdings unit to boost earnings. Since the unit was formed, Citigroup has vended over 60 businesses in Citi Holdings and reduced assets over $700 billion. As of Dec 31, 2014, Citi Holdings’ assets represented about 5% of total Citigroup assets, down from the level of more than 30%.

Bottom Line

As we look forward to Citigroup’s 2015 capital plan to the Federal Reserve this year, we believe the company is working on its internal inefficiencies and setbacks. Further, we believe these streamlining initiatives will bolster the company’s capital position, reduce expenses and drive operational efficiencies.

Citigroup currently holds a Zacks Rank #3 (Hold).

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