Citigroup, Legg Mason plan to swap assets in $3.7 billion deal

Anne D'Innocenzio

Friday, June 24, 2005 | 9:38 a.m.

NEW YORK -- Citigroup Inc., the world's largest financial-services firm, today said it agreed to a $3.7 billion deal in which it will swap most of its asset-management business in exchange for the broker-dealer business of Legg Mason Inc. as well as Legg Mason stock and a loan to the Baltimore financial-services firm.

In a separate statement, Legg Mason also said it will acquire an 80 percent stake in Permal Group, one of the world's largest hedge-fund investors, from Sequana Capital and Permal Group management, for at least $961 million in an agreement worth up to $1.39 billion. The firm also will have the option to purchase the remaining 20 percent over four years.

After the news, shares of Legg Mason rose $5.01, or 5.89 percent, to $90.00 in morning trading on the New York Stock Exchange. Citigroup rose 2 cents to $46.90 on the Big Board.

The deal is expected to change both companies. It will transform Baltimore-based Legg Mason from a regional brokerage into a money management powerhouse. For Citigroup, it would allow the company to focus its resources in areas that the company has competitive strengths, while reducing conflicts of interest that might occur from having its brokers sell its own financial products.

"Deepening our relationships with clients is a top priority, and through this transaction, we are even better positioned to meet their investment needs," said Charles Prince, chief executive officer of Citigroup, in a statement. "We are continuing to focus our resources on strengthening competitive advantages and building our leading businesses."

The agreement, which is subject to adjustments, includes about $1.5 billion in Legg Mason stock and a roughly $550 million, five-year loan from Citigroup.

New York-based Citigroup said it expects to record a gain of about $1.6 billion after the deal closes. The deal is expected to close during the fourth quarter, subject to regulatory, shareholder and other approvals.

The agreement excludes Citigroup's asset-management business in Mexico, its Latin American retirement-services operations and its interest in the CitiStreet, a joint venture with State Street Corp. that provides retirement plans and other employee benefits, the company said.

Citigroup also reached a three-year global agreement to continue offering its clients asset-management products and take on Legg Mason Wood Walker's role as primary domestic provider of Legg Mason's equity funds.

Legg Mason said both deals are expected to boost its earnings per share in the first year following the close. Analysts expect the firm to earn $4.28 per share for fiscal 2006, and $4.92 per share for fiscal 2007.

Citigroup did not quantify how the gain would boost its earnings expectations. Analysts expect the firm to earn $4.19 per share in 2005, according to a survey by Thomson Financial.

Permal Group manages about $20 billion in assets for high net-worth investors outside the United States, and its entire senior management team is expected to remain with the business, Legg Mason said. Legg Mason's board unanimously approved both the Citigroup and Permal transactions.

Citigroup said its agreement will add 1,354 financial advisers to its wealth-management business, while Legg Mason said it will get certain Citigroup operations in Japan, Hong Kong, Australia and Latin America, and will expand its presence in the United States, Britain and Singapore.

Legg Mason said it will distribute its asset management products through Smith Barney's broker force, Citigroup Private Bank, Citibank's 2,000 branches, CitiStreet, and Citigroup's Primerica operation.