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Citigroup, Legg Mason swapping divisions

BALTIMORE - Citigroup Inc., the world's largest financial-services firm, took another step back from a one-stop "financial supermarket" in a $3.7-billion deal announced Friday to swap most of its asset-management business for the broker-dealer business of Legg Mason Inc.

Investors with Legg Mason mutual funds shouldn't see much change from the deal, and although Citigroup customers could face minor hassles, analysts and company officials said they expected a largely painless transition.

The deal with Citigroup also involves Legg Mason stock and a loan to the Baltimore firm.

Legg Mason, which started as a retail brokerage firm in 1970, will focus solely on managing assets, becoming the fifth-largest U.S. asset manager, CEO Raymond "Chip" Mason said. Legg Mason's brokerage work force of about 1,300 will move to Citigroup, giving the New York company more than 14,000 brokers.

"For the consumer, at the end of the day, it should be a better deal," said David Haas, an analyst with Fox-Pitt, Kelton. "There will be more of a consumer choice for top performing managers."

Legg Mason 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.

Morningstar analyst Craig Woker said some Citigroup investors could experience late statements or problems getting company representatives to answer their questions - minor problems that can arise in deals of this type.

"Those customers will see a transition, but it should be largely seamless," Woker said. "Legg Mason is paying a low enough price that they'll probably take a slow and steady regimen to integrating" new customers.

The deal is expected to change both companies. It will transform Legg Mason from a regional brokerage into a money management powerhouse. It allows Citigroup to further withdraw from the "financial supermarket" model of the 1990s, lowering its number of products while focusing its resources in areas where the company has competitive strengths.

"They're now focusing on their core, on what they're good at," Haas said of Citigroup. "That's a marked difference than the, "Let's sell everything to all people,' one-stop shopping."

Citigroup also eliminates potential conflicts of interest that can arise when brokers sell their company's mutual funds, thereby earning more than they could by pushing a potentially better fund offered by a competing company.

"We are continuing to focus our resources on strengthening competitive advantages and building our leading businesses," said Charles Prince, chief executive officer of Citigroup.

In a teleconference with analysts, Mason said the deal "gives us a footprint of substance." Still, he called the sale of his retail brokerage business "a very, very personal, difficult decision - traumatic would be almost an understatement. But it is, in the long run, probably the way it's going to have to be."

In a separate statement, Legg Mason 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 as much as $1.39-billion. The firm will have the option to buy the remaining 20 percent over four years.

"Up until this year, their business was in the rest of the world, not in the United States," Mason said of Permal. "They have, we believe, a virtually untapped ability in the United States."

Shares of Legg Mason rose $13.01, or 15.3 percent, to close at $98 on the New York Stock Exchange. Citigroup rose 7 cents to close at $46.95 on the NYSE.

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.

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.

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

Citigroup didn't 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.

[Last modified June 25, 2005, 00:34:16]