Stockholm Syndrome

February 23, 2009

BANKS/WHITEHOUSEThe dreaded nationalization of Citigroup may have been forestalled but is hardly gone. Weekend reports said the government would take a bigger share of the bank’s common stock, igniting an off-market really in its shares. The Wall Street Journal reported the government would own as much as 40 percent; it said Citi executives would like to hold the number closer to 25 percent. The bank and the state are talking. That’s clearly better than not talking, but hardly seems to justify the big run-up in Citi shares.

The Journal says a scenario on the table has much of the $45 billion in preferred shares the government holds in Citi, which amounts to a 7.8 percent stake in the bank, being converted into common stock. Never mind how hugely dilutive to existing shareholders this would be, and how much more say the government would have in how the bank operates. In any other circumstance (think back to the nationalization of AIG) these are strong sell signals. But so long as the commentary stays focused on forestalling an outright government takeover, Citi shareholders are becoming more encouraged to increase their exposure.

As we did on Friday, DealZone wonders at the process of softening up Americans to the idea of the state taking over the bank; ergo the title of this missive. Sweden, that Keyser Soze of socialism, is considered the modern home of successful bank nationalizations, and given the terror with which U.S. investors approach the idea of even temporary government administration of a major bank, the market’s interpretation of the weekend reports as cause for celebration can perhaps be best understood as hostage mentality.

Other Deals News:

* Germany’s Merck agreed to buy MediCult for 383 million Norwegian crowns ($55.1 million) to boost its fertility treatment business, trumping a rival offer.

* China Development Bank (CDB), a major state-owned bank is looking at various local acquisition targets including Shenzhen Development Bank (SDB), a source familiar with the matter said after SDB’s shares jumped following a local media report.

* Polish builder PBG is ready to discuss with Polimex the sale of its Hydrobudowa unit in return for a large stake in the local rival, a PBG official said.

* Orascom Telecom, the largest Arab telecom firm by subscribers, said it was studying an offer for two of its information technology subsidiaries, to increase focus on its core mobile business.

* Swedish utility Vattenfall has agreed to buy 49 percent of the shares in Dutch peer Nuon and to buy the remaining stake in the coming six years, the two firm said in a joint statement.

* Qatar Telecommunications Co said it would own 65 percent of Indonesia’s PT Indosat after completing a tender offer on Feb. 18 to buy additional shares in the company from the public.

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