Update: Citigroup to Buy Associates First

Updated from 2:09 p.m. EDT

Citigroup (C Quote) became the latest high-profile financial services firm to go shopping Wednesday when it said it had agreed to buy Associates First Capital (AFS Quote) for $31.1 billion in stock.

The deal significantly strengthens Citigroup's international businesses and follows on the heels of recent mergers in the finance sector, including Credit Suisse First Boston's buyout of Donaldson Lufkin & Jenrette(DLJ Quote) and UBS' acquisition of PaineWebber(PWJ Quote).

Under the terms of the deal, shareholders in Irving, Texas-based Associates First will receive 0.7334 common shares of Citigroup for each Associates share. The deal values Associates stock at $42.49 per share, or a 52.8% premium over Tuesday's closing prices. Citigroup closed Tuesday at $57.94, up 25 cents, while Associates closed at $27.81, up 44 cents.

Associates finished Wednesday regular trading up $10.63, or 38%, at $38.63, after reaching a 52-week high of $40. Meanwhile, Citigroup ended down $2.75, or 5%, at $54.88.

The deal, which is expected to close by the end of the year, will add at least 10 cents a share to Citigroup's earnings in the first year of the combined operation, the company said in a statement. In a conference call, New York-based Citigroup said it will take a $600 million to $700 million charge as a result of the deal. However, it also expects $700 million in cost savings, with $400 million in savings in 2001 and $300 million in 2002.

Some analysts said the company's projections for the deal are conservative.

"We believe the two companies would be an excellent fit and think the transaction will be more accretive than the company is stating," wrote Merrill Lynch analyst Judah Kraushaar, in a report released Wednesday.

"Over the past 10 years Associates First has had 23% compound growth in pre-tax earnings, a high-growth operation, in our view, which is consistent with Citigroup's focus on acquiring high-growth targets," he wrote.

Another analyst similarly praised the deal. "I think it's a superb deal," said Richard Bove, who covers both companies for Raymond James & Associates. "[Citigroup] went to the business that everyone's avoiding -- the consumer finance sector." The market has been far kinder to brokerage firms -- the targets of the recent finance mergers -- and thus have commanded higher prices on the auction block, he said. For example, PaineWebber is currently trading at over 20 times earnings, and is still below the price that UBS agreed to pay when it agreed to buy the firm in July. In contrast, Associates First is trading at slightly over 13 times earnings -- and that is after the run-up in price following the buyout announcement.

"Citigroup is buying on the cheap relative to what people are paying for these brokerage firms," Bove said. He has a strong buy on both companies, and his firm has not acted as an underwriter for either Citigroup or Associates First.

Citigroup and Associates First have a number of overlapping businesses, including credit cards, insurance and leasing. Citigroup is the largest credit card company in the world, and Associates First will bring 20 million new credit card accounts to the combined business, or an additional $13 billion to Citigroup's $75 billion credit card business.

The deal price values Associates First at about 16 times 2001 earnings, "which is low relative to past transactions and the company's historic high stock price," wrote Mark Alpert, an analyst at Deutsche Banc Alex Brown. "However, at a 52% premium to the close, Associates shareholders should cheer the deal." Alpert has a buy rating on Associates, which he will review in the wake of the deal. His firm has had no underwriting relationship with Associates First within the last three years.

Associates First, founded in 1918, has strong operations in Japan, where it is the fifth-largest consumer finance company, and in Europe, where it has over 700,000 customers. "In one step, we catapult our international earnings in these rapidly growing segments by more than 40%," Sanford Weill, Citigroup's chairman and chief executive, said in a statement.

Associates First caters to the consumer market and concentrates on six major areas: commercial operations, credit cards, home lending, insurance and business development, international operations and U.S. consumer operations. The company has over $100 billion in assets, and 2,750 offices in the U.S. and 13 other countries. Citigroup, meanwhile, has more than $791 billion in assets and operates in over 100 countries.

Following the close of the transaction, Associates' North American consumer finance operations will be combined with CitiFinancial, Citigroup's consumer finance business, and Associates' credit card operation will be combined with Citibank's card operations. Keith Hughes, chairman and chief executive of Associates, will join Citigroup's board of directors and become a Citigroup vice chairman. Roy Guthrie, senior executive vice president and chief financial officer at Associates, will have responsibilities that include the Associates' current operations in commercial and international finance.

The deal is the latest for Weill, who has built a financial empire by steadily acquiring rival firms. He came to the helm of Citigroup through the 1999 merger with Travelers Insurance, a firm Weill bought in the early 1990s.

The deal leaves Home International (HI Quote) as the only remaining major stand-alone consumer finance company, although it is not considered a takeover target, according to a Merrill Lynch report.