Citi Warrants 'Way Out Of The Money': Academic

Updated to include Citi statement and stock hitting new 52-week highs.

NEW YORK (TheStreet) -- The U.S. Treasury Department plans to auction its warrants in Citigroup (C) this quarter, a move that could add another $111 million onto the federal government's profits on its Citi stake sale, according to one academic.

However, Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, notes that the warrants are still a speculative play that's currenlty "way out of the money."

The Treasury said on Friday that Deutsche Bank (DB), its bookrunner for warrant offerings, will begin holding public dutch auctions for warrants to buy common stock in Citi, Boston Private Financial Holdings (BPFH) and Wintrust Financial (WTFC) in the near term. The government received its Citi warrants through various bailout programs to help stabilize the financial system.

The Treasury has nearly 400 million warrants to buy Citi stock, some with an exercise price of $17.85, which expire on Oct. 28, 2018, and others with an exercise price of $10.61, which expire on Dec. 31, 2018. Citi shares hit new 52-week highs on Friday, rising as much as 2.2% to $5.15 in intraday trading, but have a long way to go toward those exercise price levels.

Wilson estimates that the warrant sales could bring in anywhere from $49 million to $355 million, with a middle-of-the-road estimate of $111 million.

"The Citigroup warrants are way out of the money," says Wilson. "This auction will be a test of investor's appetite for very speculative warrants."

The Treasury completed its sales of Citi common stock last year, booking a $12 billion from a $45 billion investment that was initially in preferred stock, as well as a $301 billion asset guarantee.

In a statement, Citigroup said it's "pleased that the Treasury has announced its plans to exit from its warrant positions in Citigroup. Citi is very appreciative of the support provided by the Treasury and taxpayers during the financial crisis."

-- Written by Lauren Tara LaCapra in New York.

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