Citigroup Inc will sell its Phibro energy trading business to Occidental Petroleum Corp, allowing the bank to defuse a battle with regulators over a $100 million pay package for the unit's star trader.
Citigroup is shedding a business that has generated profit by taking big risk, while oil and gas producer Occidental is venturing into new territory after long trading conservatively. Occidental was drawn to a bargain, analysts said.
The price of the transaction was not disclosed, but Occidental said its net investment would be only about $250 million and that it was paying roughly the net asset value of the business. Analysts concluded that Citi had sold Phibro for a pittance.
Andrew Hall, the unit's star trader, will invest in the business alongside other executives, and his 2009 compensation will be paid out in future years based on the unit's performance.
Hall, who famously collects contemporary art that he houses in a castle in Germany, has become a lightning rod for criticism over Wall Street compensation.
The Obama administration's “pay czar,” Kenneth Feinberg, who is reviewing compensation at major bailout recipients, would have struggled to change Hall's 2009 pay package because he lacks legal authority over long-standing contracts, according to people familiar with the matter.
Feinberg pressed Citigroup to fix the problem, and to reduce Hall's pay in future years, people familiar with the matter said, making Hall unlikely to stay.
Phibro has been profitable in recent years but has lost money in the past. In 1998, Citigroup put the unit on the auction block because of its wildly fluctuating profits, but the bank never found a buyer.
Government regulators have particular sway over Citigroup, which has yet to repay a $45 billion taxpayer bailout and is roughly one-third owned by taxpayers.
Last month Citigroup Chief Executive Vikram Pandit said publicly that $100 million was too much for an employee to earn, given the bank's circumstances.
“When the government is an owner and Congress and regulators are looking over (CEO Pandit's) shoulder when he writes a check, then he has to be trembling if he writes a $100 million check,” said Holland & Co President Michael Holland, who worked with Hall in the 1990s.
Citigroup said the sale was not material to its earnings. Hall and his team trade out of a former dairy farm in Westport, Connecticut. The Phibro unit operates almost completely separately from the rest of Citigroup, meaning that removing it should have no impact on the bank's other businesses, including its commodities trading business for clients, people familiar with the matter said.
The sale of Phibro would be the latest in a series of divestitures by Citigroup. Earlier this year it sold a controlling stake in its Smith Barney retail brokerage to rival Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), as it faced pressure from regulators to raise capital and overhaul operations.
Citigroup considered many options for its Phibro business, ranging from spinning it off to opening it to outside investors, people familiar with the matter have told Reuters. (Reuters)