Categorized | Featured, IPO, Short Ideas

Citigroup Taps a Liquid Market

Primerica Inc. (PRI)The current market is flush with liquidity as speculative traders search for opportunity.  Growth and speculative companies are especially attractive due to the potential high returns if the economy really is on track for a full recovery.  Faithful readers of ZachStocks know that I am hesitant to buy into the “full recovery” argument, but that doesn’t mean we can’t make money trading this speculative environment.

The ample liquidity has allowed new companies to raise capital to build their businesses, and has also allowed private equity investors to unload positions at a profit as the public market snaps up shares.  Last week Citigroup (C) took the position of a private equity player by selling a large portion of its position in Primerica Inc. (PRI).  The stock was issued to the public at a price of $15.00 and quickly began trading near $20.


Investors are likely very happy with their 30% plus gain in a single day and it looks like Citi may have sold itself short, as it could easily have collected $17 or $18 for the stock and still made investors very happy.  Fortunately for the company, it still owns roughly 40% of the company so it should be able to write up the value of its holdings.

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The transaction has certainly benefited Citi as the company was able to raise roughly $300 million.  That number is actually very conservative because as part of the convoluted transaction, Citi issued warrants to Warburg Pincus LLC, and also was the lead underwriter for  the stock – meaning Citi was able to keep a large portion of the underwriting discount usually paid to brokers who place IPO stock.

Primerica could be considered a “low-tier” financial services company whose primary business is selling life insurance.  The target client includes middle income families with $30,000 to $100,000 in annual income.  The prospectus lists these client as:

  • Having inadequate or no life insurance coverage
  • Needing help saving for retirement
  • Needing to reduce consumer debt
  • Preferring face-to-face meetings for financial decisions.

While this target market covers a large percentage of households (Citi estimates the demographic at 50% of US households), the margins on this segment of customers is usually relatively low.  That is why Primerica was considered the perfect solution for Citi – allowing middle income households to be served by Primerica while the Citi financial professionals focused on the bigger and more profitable clients.

Why gold will not make new highs or lows this year

Why gold will not make new highs or lows this year

The problem that I have with the Primerica business model is that the representatives often take a multi-level marketing approach to building their client base.  In the prospectus, Primerica speaks of “independent entrepreneurs” who are responsible for building and operating their own businesses.  These representatives are classified as independent contractors and are not official employees of Primerica.  Many of these “financial representatives” are part-time workers and Primerica actually encourages this aspect in order to attract more representatives.

The end result is that many of these representatives have little experience, a deficient knowledge base, and may not be giving the best advice to clients who need financial information.  While there are of course exceptions, Primerica has become known as the “Amway” of financial services – a reputation Citi would like to distance itself from.

I must say that I am a bit surprised at how well the IPO has been accepted by the market.  Financials are still a bit sketchy as it is difficult to understand the pro-forma numbers presented in the prospectus and account for the adjustments.  Below is a flowchart of the organizational structure which shows the convoluted state of the offering.

Primerica Org Chart

With this much complexity, I would avoid buying the IPO at this point as the market hates uncertainty and once the hype of the IPO wears off the stock could drop quickly.  Farther down the road, I expect Citi to unload the rest of its  shares and Warburg will likely exercise its warrants and liquidate the shares as well.

Aggressive traders might consider shorting below $19.60 but don’t get too greedy.  Citi will defend this stock vigorously as they still have a vested interest in the deal working.  So the stock could drop to $17 or even $16, but the IPO price is important for Citi to defend so I would expect them to start buying aggressively at the $16 level.

Other Articles of Interest
Resurging IPO Market Adds Liquidity for Businesses and Owners
Explosive Growth Opportunity in Latin American
Primerica – A Multi-Level Marketing Scheme
WSJ: Citigroup’s Primerica IPO Soars 31%
 

Typically an IPO that trades well out of the gate is likely to continue its positive trend.  But Primerica is a different animal and I wouldn’t put too much confidence in the positive initial reaction.

Primerica Inc. (PRI)

FD: Author does not have a position in PRI

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Citigroup Taps a Liquid Market

18 Comments For This Post

  1. sabrina Says:

    Thank You!!!!!!!!!! for the information.

  2. BIG-MONEY Says:

    ONE TRILLION DOLLARS IN OFF BALANCE SHEET LOSSES is more than ten times what Citibank is worth. Citibank also has a secret $500 billion loan from the Fed that the shareholders have not been told. Citibank is in a black hole that it will never be able to get out of and it will keep sucking up every thing given to them in vain as Citibank will be closed in a very short time. Citibank is unable to remain as an on going concern Lu Soro has told a Federal Judge in an effort to regain his invented trademark, created in 1976 for his mortgage company and hijacked by Reed and Weill in 1998 for the new company that was formed, I have read.

  3. John Chapman Says:

    Secret 500 Billion. I’m laughing all the way to the bank.

  4. Alex Sebastian Says:

    Can someone please explain why Citi still has a market cap well over $100B? I mean when are they even expected to become profitable again?

  5. BigB_2010 Says:

    Zachary, I disagree with your suggestion of avoiding this IPO. I recently sat down with a PRI rep who knew more about finances then anyone I dealt with at a bank. This is because it is just a job for people working at a bank. It’s a business for PRI reps. To keep business, you need to be on top of your game. In addtiona to this, what is the key to any successful business? Distribution and Leadership. PRI has this and, as time will tell, will be very successful.

  6. mmillar Says:

    Zachary,

    As a Regional Leader with Primerica, I will aggressively disagree with several of the statements in this article that lead readers to believe that it is a bad thing that the company is focused around a network marketing approach and utilizes independent contractors.

    Without knowing anything about the background and past experience of these representatives, it is unfair to categorize them all as if to say they are inexperienced or unqualified. Case in point, two of the people on my team left Merrill Lynch and Ameriprise with a combined 19 years of experience in the financial services industry, and knowing what they knew, they already saw great merit in Primerica as well as their opportunity for growth. The fact that representatives are not employees, but are independent business owners, only serves to give them more value and drive to become successful.

    Without a doubt, there are people that join Primerica for the opportunity, and then simply don’t have the desire to become succesful by learning all they can about how money works so that they can properly educate our clients. Those people give up after a short time and leave the company. It is the rest of us that stick with it, not only because of the story behind the company and how the moral and ethical values that we promote lead to providing better service for our clients… not only because of the opportunity to grow a business that can be left as a legacy to our children… not only because of the potential to earn great amounts of income by working hard to build up a team of professional, knowledgeable, and respected consultants… but we stick with it because we don’t only believe in what we are doing with our heads, but it’s in our hearts too. When I sit down with a family that is in financial trouble, I provide them with a financial plan that shows them how to change their spending pattern without needing to spend more every month, and provide them with a solution so they can get out of debt faster, provide for proper income protection, and savings for their retirement or their children’s education… and I don’t charge them a penny for doing any of that. Where’s my reward? Of course, if I provide them with any products that can help them, I earn commissions… and in the cases when they don’t require any products or they are better served by similar products from other sources, I earn nothing besides the peace of mind of knowing that I did the right thing to help that family… but moreso, the reward comes from the referral business that they will send my way.

    You may be good at reading financial fundamentals on a company’s SEC statements and providing your opinions about the fiscal strengths and values of a company’s stock, but perhaps you should stick to advising in that capacity and refrain from publishing opinion about what a company does or how they do their business until you truly know what you are talking about.

    – Mike

  7. G Rae MacAllistar Says:

    Mike,

    Of course, I am not as familiar with Primerica as yourself (also not as biased) but I have a good friend who is an RVP in the organization and have come to learn a few things. Zachary is not wrong but it’s important to separate the company from the distribution chanel. Primerica reps are not employees, 90% of them will come and go and 90% of them make no money. The MLM structure counts on that. If everyone who joined tomorrow could make RVP, then the pyramid would have to expand exponentially. Pretty soon, 1 in 3 people in the U.S. would be Primerica reps. This is evident in the way that recruiting is more important to reps than selling the product -and in the way they make recruits PAY MONEY TO JOIN. And they recruit anyone from anywhere. While I’m sure there is the odd anecdote of a successfull Merrill Lynch veteran jumping ship to be a “business owner” (assuming the guy wasn’t fired or chased out for embezzling), these are far outweighed by gas station attendants who joined with the promise that they could become rich. This is what bothers me about this model, the only thing anyone speaks of is money, and free trips. My friend is the least educated of my group, but perhaps the smoothest talker. He does not try to recruit from our social network of bankers and traders, but does engage assistants, retail store employees -people who are a bit more needy and who would love to buy into the idea that you don’t have to be too smart to become rich.

    While I respect that you care about your clients financial needs, I witness more of my friend’s downlevel reps trolling malls looking for recruits than putting their time into understanding the markets and financial products.

  8. Zachary Scheidt Says:

    Wow – seems like I hit on a sore subject. To be fair, I will point out that I did say that there are exceptions to the experience level of the representatives (http://zachstocks.com/2010/04/citigroup-taps-a-liquid-market/) and I know that there are some “business owners” who are legitimate in their endeavors.

    But the stigma still stands. I’ve been approached by several Primerica consultants who explained over lunch or coffee how I could become a “business owner” and fit into the pyramid looking structure.

    As a general rule, I was appalled by the knowledge and experience of these representatives (AND ONCE AGAIN I KNOW THERE ARE EXCEPTIONS) – but many of these reps were recruiting their parents, neighbors, babysitters and others to join in their business. If this is where middle income America is supposed to get their financial advice, we are in serious trouble.

    Sticking to the investment – yes, you’re right. My purpose is not to debate the merits of Primerica as a service to middle America but to analyze the stock as an investment vehicle. And with significant selling pressure likely to increase as Citi and other private investors dump their positions, I believe there is risk in owning the shares.

    I could be wrong – it wouldn’t be the first time and it certainly won’t be the last. Primerica could shoot to $30 or higher. But with the risk of selling pressure and what I believe to be a poor business model, Primerica strikes me as a better short than long position.

    Thanks for the comments guys,
    zachstocks.com

  9. Investorsgroup Says:

    G. Rae MacAllistair & Zachary,

    I disagree with you guys in parts.
    As an investor in this firm, I did my research.
    I found that over 15% of the reps have been with Primerica for 15years
    or longer and 30% of reps for 10years or more.

    Additionally, they cannot offer products or help clients unless being schooled and licensed first.

    Secondly, their backgrounds have to be CLEAN/CLEAR else they will not be issued a life insurance or securities or mortgage licenses. Which also means they cannot work with PRI.

    Thirdly, I’ve also found that Primerica provides a lot of training and education to their reps in order to beat their competions.

    These things were important to me in investing millions in this firm.

    Check them out for yourselves too.

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