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Citigroup sells $7.5 billion stake to Abu Dhabi fund -- What it means

Citigroup (NYSE: C) has sold a 4.9% stake in itself to the Abu Dhabi Investment Authority for $7.5 billion, making the fund the company's single largest shareholder. The fund will serve as a purely passive investor and will not have any role in the management or governance of the company.

The move raises serious questions about the company's balance sheet, corporate governance and strategic direction. Citigroup has reiterated its commitment to maintaining its dividend repeatedly, and Wall Street seems to like that.

But think about it: Citigroup is currently trading at close to half its 52-week high, an astounding dubious accomplishment for a company of its size and status. With the stock having tanked, the company is diluting shareholders by selling off the company at its current valuation.

If Citigroup management believes in the company's strength, here's what they should do: Put out a press release announcing the temporary suspension of the dividend and explain that Citigroup has been faced with a choice of selling a stake in the company or cutting the dividend. Given the paltry valuation the stock currently trades at, management could convince shareholders it believes this would be a terrible time to sell off the company at firesale prices. For this reason, management could say they are suspending the dividend and will be buying back stock on the open market as liquidity allows.

Selling off the company at a bargain basement (relative to a few months ago, at least) price while returning cash to shareholders with a hefty tax doesn't speak well for the future of Citigroup. It's actually a strategy that only makes sense if the stock is destined to continue its downward spiral.

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Last updated: December 02, 2008: 06:50 PM

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