Citigroup-Legg deal runs into some snags

Shareholders unhappy, might pose obstacle

September 08, 2005|By Laura Smitherman | Laura Smitherman,SUN STAFF

At least part of Legg Mason Inc.'s deal with Citigroup Inc. to swap parts of their businesses, which both firms hope to seal by the end of the year, could be held up by a regulatory ruling and a few unhappy mutual fund shareholders.

New York-based Citigroup agreed in June to trade most of its money-management operation for Legg Mason's brokers, investment bankers and traders. The $3.7 billion deal must be endorsed by fund shareholders, and that process has hit some snags in recent weeks.

First, two major investors in six of Citigroup's funds are urging shareholders to vote against moving to Legg Mason, to draw attention to long-held grievances over the value of their holdings. Then, the New York Stock Exchange decided that brokers couldn't cast ballots on behalf of Citigroup fund investors without first getting instructions from clients, making it more difficult to get the votes needed for shareholder approval.

Analysts said Legg Mason and Citigroup might close the bulk of the transaction and handle funds with dissident investors separately.

"I would think Legg Mason and Citigroup would be anxious to move along as fast as possible on the portion of the transaction that doesn't have any of these sticky issues," said Burton J. Greenwald, a consultant to the mutual fund industry. "They don't want to hold up the entire transaction."

Without votes from brokers, who often side with management and turn in large blocks of ballots, Citigroup will have to get votes from fund shareholders, who are often ambivalent. For the deal to go through, at least half of those shareholders must cast a ballot.

"We think they have a very high barrier to overcome," said Cody Bartlett, portfolio manager at Karpus Investment Management, one of the dissident investors. "I suspect they will enter into a heavy and costly solicitation of shareholders to get through as many funds as possible."

Citigroup spokeswoman Mary Athridge said that the timetable for closing the deal in the fourth quarter hasn't changed, and that a shareholder meeting where all votes are tallied is still planned for late next month. "The closing of the Legg Mason transaction will not be affected by any of the funds that potentially may have proxy contests," Athridge said.

A Legg Mason spokesman declined to comment.

In proxy materials addressed to shareholders in CitiFunds, Salomon Brothers and Smith Barney funds, Citigroup says investors would benefit from being part of Legg Mason, which would become the world's fifth-largest money manager focused solely on investing assets for clients. Citigroup agreed to the swap so that it could concentrate on offering investment advice through brokers.

Karpus, along with hedge funds Elliott Associates and Elliott International, have threatened to launch full-scale proxy fights, which would entail mailing their own proxy materials to shareholders. The six funds owned by Karpus and Elliott represent a fraction of the 200 Citigroup funds being transferred to Legg Mason, or about $3 billion of $437 billion in assets.

Karpus and Elliott are invested in "closed-end" funds, which are pools of investments like traditional mutual funds but are traded on exchanges like stocks. The funds have a set number of shares, so their share prices are subject to the forces of supply and demand, and the share price could fall below the actual value of the underlying investments.

That "discount" on the share price in some of Citigroup's closed-end funds has irritated investors, and they have asked the mutual fund boards to remedy the situation. Some options would be to open the funds to new investors or to liquidate.

"Are we opposed in principle to Legg Mason versus Citigroup? Of course not," said Mark Levine, a portfolio manager at Elliott, the largest shareholder of the Salomon Brothers Fund with a 6 percent stake. "But we are opposed to this deal without the board first taking steps to eliminate or nearly eliminate the discount."

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