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Citi Set to Complete Preferred Exchange

Citigroup shareholders approved the final step allowing it to complete its preferred-to-common share exchange to bed.

(Updated with analyst comments, additional details on reverse stock split and closing stock price)



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shareholders approved the final step allowing it to complete its preferred-to-common stock exchange, ending a six-month ordeal that wreaked havoc on the stock's trading.

Citi said in a release Thursday that shareholders agreed to a proposal that will allow the company to increase the number of authorized shares of common stock to 60 billion, up from 15 billion. The move will give the company room to maneuver above its current number of shares outstanding as it completes the exchange, which was first announced in February.

The increase in shares of common stock allows Citi to complete its exchange offer with the U.S. government and certain private holders by swapping the

interim securities

they received on July 23 for common stock. The conversion will be effective at the close of business on Sept. 10, Citi says.

Citi said that the warrants associated with purchasing shares of Citi common stock issued on July 23 to the U.S. government and certain private holders have become "null and void."

The upcoming completion of the exchange "marks the end of a lengthy, complex process and effectively puts

Citi in a solid capital position," writes Bank of America Merrill Lynch analyst Guy Moszkowski in a note. It provides Citi "with ample room to absorb future losses, even in our worst-case scenario."

While third-quarter earnings results "will include plenty

of conversion-related noise, we continue to find the risk/reward in

Citi attractive," he adds. Moszkowski rates the company with a buy.

At the completion of the exchange, Citi will have approximately 22.8 billion shares of common stock outstanding vs. 5.5 billion at June 30. The U.S. government will own 7.69 billion shares, or 33.6% of Citi's outstanding shares.

Citi shares hovered in a tight $3-trading range for much of this year, as some traders sought to

exploit differences

in pricing on the preferred shares and the common stock it would be exchanged for through arbitrage trades. Only recently did the stock start to rise closer to the $5 mark now that the exchange is being completed. Public shareholders had previously completed their share exchange. Shares closed up 4.6% to $4.77.

While it's true that Citi's businesses are struggling more than large counterparts like

JPMorgan Chase

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and even

Bank of America

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, Citi's stock has had more downward pressure on it as traders shorted the common stock and went long the preferred. They have since been unwinding their short positions for the last month or so since the U.S. Treasury and other preferred holders received the interim securities.

Citi shareholders also approved two other resolutions. Investors of common stock will no longer have the right "to vote on any amendment to the restated certificate of incorporation that relates solely to the terms of any series of preferred stock," the company said in a release.

Shareholders also voted to allow the board of directors to implement (but not require) a reverse stock split at a ratio of 1:7, by June 30, 2010.

Moszkowski added that if the company does decide to do a

reverse stock split

, it will have no "economic or fundamental impact," but rather is more "optical" than anything else. It may make the stock "investable" for a wider audience, Moszkowski writes. Mutual funds, for example, have strict requirements that sometimes prevent them from investing in stocks below a certain price threshold.

A reverse stock split reduces the number of a company's shares outstanding, but increases the value of its earnings per share. The market value of the shares remains the same. Companies often elect to do a reverse stock split in an effort to make their stock look more valuable if the share price is significantly low. Citi's shares dropped below $1 a share in March on the fear that the government's efforts wouldn't be enough to save it from failing.

The completion of the exchange comes as other large banks moved to disentangle themselves from the government now that the stress tests are completed.

Goldman Sachs

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, JPMorgan Chase,

Morgan Stanley

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American Express

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US Bancorp

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, among others, have already repaid TARP funds.


has been the poster child for the financial crisis, losing more than $100 billion from writedowns on toxic assets and bad loans made during the height of the credit cycle.

-- Written by Laurie Kulikowski in New York.