GD Star Rating
Years after Sandy Weill built Citigroup, Vikram Pandit has been working day and night to divest all ancillary businesses in order to raise capital and pay back the U.S. government for one of the largest bailouts in history. To date, Citigroup has already sold its Japanese brokerage, its commodities trading unit, and credit card assets. The most recent divestiture/IPO for Citi is its insurance division, Primerica, the insurance company that Sandy Weill used to build Citigroup into the powerhouse it was in 2005/2006. The IPO reflects improvements in the market. There are 4 IPOs planned for this week. Primerica will be selling for a sharp discount of 7x PE compared to other insurers, which trade at about 9x P/E. Warburg Pincus will be purchasing about 30% of the IPO with warrants to purchase more shares in the future. The division has 100,000 representatives selling financial services to households with $30,000 to $100,000 in annual income. It earned $495 million in 2009, almost 3x as much in 2008. Primerica will trade under the symbol “PRI.”
According to Michael Tsang & Craig Crudell of Bloomberg, “Primerica Inc., the insurance business that Sanford I. “Sandy” Weill used to build Citigroup Inc., is selling shares in an initial public offering at a discount to its competitors.
Primerica plans to raise $252 million tomorrow, a filing with the Securities and Exchange Commission and Bloomberg data showed. At the middle of its price range, the Duluth, Georgia- based distributor of consumer-finance products from term-life insurance to mutual funds would be valued at 6.74 times earnings after accounting for its planned reorganization. That’s 29 percent less than the median for U.S. life and health-insurance providers, data compiled by Bloomberg show.
Citigroup Chief Executive Officer Vikram Pandit is dismantling the company Weill built spending about $50 billion on Travelers Corp., Salomon Inc. and Citicorp during the 1990s to offer everything from insurance to stock broking and branch banking. The sale comes after the Standard & Poor’s 500 Index’s rally to an 18-month high spurred a rebound in the IPO market.
“The Primerica deal reflects a shift from the financial supermarket model, where instead of being good at a lot of things, a company like Citigroup ended up being mediocre at everything,” said James Dailey, who oversees $140 million as chief investment officer at TEAM Financial Asset Management LLC in Harrisburg, Pennsylvania. “Primerica could fetch a reasonable price. It’s been around a long time, its brand is established.”
Primerica is one of four U.S. companies scheduled to sell shares through initial offerings this week.
All five IPOs since March 15 have priced within or above their forecast range as the S&P 500 extended a rebound from its 2010 low on Feb. 8 to 11 percent. The previous 14 deals since the start of the year had been cut by 24 percent on average, data compiled by Bloomberg show.
Carlyle Group’s Windsor, Connecticut-based SS&C Technologies Holdings Inc., which sells trading and investment management software to the financial industry, and Meru Networks Inc. of Sunnyvale, California, which makes Wi-Fi networking equipment, are scheduled to price their IPOs today. Carlyle, the Washington-based buyout firm that oversees $89 billion, won’t sell SS&C shares in the $161 million offering.
Tengion Inc., the East Norriton, Pennsylvania-based company trying to grow replacement organs and tissues, is also set to hold its IPO this week, according to Bloomberg data.
Primerica, which has 100,000 representatives selling financial services to households with $30,000 to $100,000 in annual income, earned $495 million in 2009, an almost threefold increase from a year earlier.
Net income rebounded after declining 72 percent in 2008, when Primerica wrote down some of its goodwill, or the amount paid above the net asset value in an acquisition.
As part of its reorganization, Primerica will transfer 80 percent to 90 percent of the “risk and rewards” from the life insurance policies that it sold and distribute $622 million in assets to Citigroup before the IPO, according to the filing. That includes a $454 million one-time dividend to Citigroup.
At the middle of its $12 to $14 price range, the company is valued at 6.74 times its 2009 per-share income of $1.93, after taking into account a decrease in revenue and profit that would have taken place if the reorganization occurred on Jan. 1, 2009, according to its filing and data compiled by Bloomberg.
That’s less than the median 9.52 times price-earnings ratio for 23 publicly-traded U.S. life and health-insurance providers, Bloomberg data show.
Prudential Financial Inc. of Newark, New Jersey, the second-largest life insurer, and Ameriprise Financial Inc., the Minneapolis-based financial planning and services firm, command higher valuations, data compiled by Bloomberg show. Primerica lists the two companies among its biggest competitors.
Buyers of Primerica’s IPO will own 24 percent of the insurance firm after the offering.
They will also be investing alongside New York-based Warburg Pincus LLC, which oversees $30 billion. The private- equity firm agreed to buy 17.2 million shares, or a 23 percent stake, in a private sale at the IPO midpoint price, and warrants to purchase 4.3 million shares at a 20 percent premium. Warburg’s stake may increase to 33 percent if the firm exercises its right to buy additional shares from Citigroup.
“It’s a ‘fire sale’ by Citi,” Francis Gaskins, president of IPOdesktop.com in Marina del Rey, California, said in an e- mail. Also, “the IPO investor can get in on the same terms as Warburg. There appears little, if any, risk in this IPO at $13.”
All proceeds will go to New York-based Citigroup, which is serving as the lead underwriter for the sale. Primerica is part of Citi Holdings, the collection of businesses that Citigroup’s Pandit said he would sell, wind down or restructure.
Pandit is dismantling Weill’s empire after loans and investments tied to the U.S. subprime mortgage market led to $47.6 billion in losses since the last quarter of 2007. Citigroup took a taxpayer-funded bailout after the credit markets froze, Lehman Brothers Holdings Inc. collapsed and Bear Stearns Cos. and Merrill Lynch & Co. were forced to sell themselves. All three companies were based in New York.
Weill used Primerica to build Citigroup through a series of acquisitions. In 1992, Primerica bought a 27 percent stake in Travelers, then took over the company a year later for $3.3 billion, keeping Travelers’ name and umbrella logo.
The company acquired Salomon in 1997 and in 1998 merged with Citicorp in a $37.4 billion deal to create Citigroup.
“This provides an important message that Citi is prepared to shed assets which clearly do not fit the current strategy, even if they have well-known brands,” said Richard Staite, a London-based analyst who covers financial institutions at Atlantic Equities LLP. “It’s a high-profile sale.””
According to Reuters, “Few other financial services companies cater to Primerica’s niche– lower-middle-class and middle-class families. And the offering’s valuation is relatively low compared to other life insurance companies.
Private equity firm Warburg Pincus will buy up to a third of the company, which is a vote of confidence in the business, analysts said.
“Warburg Pincus has put this thing together and they expect to make money. If people buy at the IPO price they’ll be buying right along with Warburg’s price,” said IPOdesktop.com President Francis Gaskins said on Friday.
There are definitely risks in buying Primerica shares. Primerica will not keep any of the proceeds from the offering, so the funds will not bolster the insurer.
Citi, which is leading the underwriters, is taking the IPO proceeds, and has taken substantial funds out of the business through dividends in recent years– nearly $1 billion since 2007. The bank will take another $622 million in dividends before the completion of the IPO, according to its prospectus. Those are funds that Primerica will not be able to invest in its growth.
“When there is a spinoff generally the parent extracts its pound of flesh, which is certainly the case here,” said Linda Killian, a portfolio manager with Connecticut-based Renaissance Capital.
But Primerica can still grow at a healthy clip, Killian said.
“The company is a very sales-oriented company that focuses on the really middle income America that doesn’t get a whole lot of financial services help from some of the larger companies that tend to focus on higher net worth individuals,” Killian said.
Most of the risk — and profit — from life insurance policies that Primerica has sold in recent years will be ceded to Citigroup, but Killian estimates that Primerica could replenish its book in as short a period as four to five years.
Primerica posted net income of about $495 million and revenue of $2.2 billion in 2009.
The group the firm serves is underinsured and needs to boost its investments, especially coming out of the financial crisis, said Clark Troy, a senior analyst at Aite Group.
The shock from the crisis has revealed to consumers that they might not be as well-prepared for retirement and other major milestones as they ought to be, Troy said. Middle class consumers may find Primerica’s pitch persuasive, he added.
“Its a financial product that can be priced attractively and give (the consumer) a lot of comfort,” Troy said.
After the IPO Citi will own 32 to 46 percent of the stock and private equity investor Warburg Pincus LLC [WP.UL] will own 23 to 33 percent of the stock.
In a separate, private deal Warburg Pincus has agreed to buy about 17.2 million shares, and warrants to buy another 4.3 million shares at 120 percent of the IPO price, assuming Citigroup meets certain conditions. Warburg also has the right to buy up to another $100 million worth of shares at the IPO price.
Citi, which accepted $45 billion worth of U.S. government bailout funds, has not made a secret about wanting to divest itself entirely of Primerica. But that is because Primerica is not part of its main banking business, and does not mean the unit is a bad business
If Primerica PRI.N prices at the midpoint of the expected range it will have a price to book value of 0.7. By comparison Ameriprise Financial Inc (AMP.N) and Prudential Financial Inc (PRU.N) are over 1, said IPOdesktop.com’s Gaskins.”