In January 2007, Citigroup purchased Egg - a UK online bank - from Prudential plc for £575 million ($1.1 billion). Why?
Expressing personal views, I can see four clear reasons.
(a) Egg operates in a growth market ... (b) in which Citigroup has proven expertise
(c) Egg resolves a Citigroup retail distribution weakness ... (d) at an opportunistic price
Europe lags North America in consumer adoption of charge cards, such as credit cards and debit cards. But European consumers are catching up. In the UK, the European country with the highest adoption of charge cards, then the amount spent on charge increased 50% between 2001 and 2005 (£313 billion to £470 billion) and is forecast to grow to £639 billion by 2010. At the time of acquisition, Citigroup Consumer Bank and Egg had 800,000 and 2,900,000 UK charge customers respectively.
Citigroup generates billions of dollars of net income annually from its Consumer businesses - $12.0 billion and $10.9 billion in 2004 and 2005 respectively. And it does so in an efficient way, with return on assets of minimum 2%. In contrast, Egg has reported losses in three of the four last fiscal years. That there is opportunity for Citigroup to leverage its expertise to enhance the performance of Egg seems entirely reasonable.
Ctigroup Consumer has a lesser presence in the UK, perhaps in Europe generally, than in many other geographies - certainly including the US (where it has 120 million charge cards). In the UK, Citibank has but a handful of retail branches and lacks referrals from the mighty Smith Barney private client network ($1,200 billion client assets globally, but minimal in UK). Egg brings strong UK distribution capabilities to Citigroup, likely allowing other Citigroup products to be offered to existing and new Egg customers.
At £575 million, the purchase price for Egg is considerably lower than the £973 million valuation paid only 12 months previously when Prudential plc bought out the remaining 21% minority shares. It was valued at £1.3 billion when it was floated on the London Stock Exchange in 2000. Were Citigroup to increase return on assets at Egg up to its own 2%+ performance then, given Egg's assets of £11-12 billion, this would generate £200 million+ incremental net income. Plus income from cross-sell, e.g. Citigroup products to Egg customers.
The Citigroup press release provides business metrics for Egg.
Click graphic to download one-page PDF on the purchase of Egg by Citigroup.
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