With Citigroup insolvent and in need of more cash infusions, they have been asking their investors to convert their preferred Citigroup shares into common stocks. Reports from America say that the Government of Singapore Investment Corp (GIC) will say no.
GIC is refusing to convert their preferred Citigroup shares into common stock and the reason is simple. It’s not a good deal.
Based on the terms of the initial purchase, GIC must convert at a 20% premium above the reference price, which is based on the average Citi share price in the days following the initial announcement on Jan 15, 2008. That reference price comes out to US$26, so that means that if GIC want to convert their shares into common stocks, they must pay over US$31 a share. Citi's current price is at US$2.14 on Monday.
GIC will want to keep its US$6.88 billion investment in the US bank, but chances are that Citi will reaches some kind of agreement with US officials that includes a greater government role. Let call it what it is; the nationalisation of Citibank. If the US government does that (and most believe they will have to for Citigroup to survive), this will lead to a dilution of GIC's stake.
With such dangers, I fully support GIC’s decision not to do the conversion. Paying US$31 a share when the price on the market is just above US$2 is nonsense. Walk away from the investment if they have to, but let’s not be taken for a ride. Good decision!