Citi Escapes Big Bonus Issue, Unloads Phibro to Occidental (C, OXY)

If you can’t take the heat, get out of the kitchen.  That is what Citigroup, Inc. (NYSE: C) has done over its Phibro commodities trading unit.  Occidental Petroleum Corporation (NYSE: OXY) has signed an agreement to acquire Phibro LLC from Citi “for approximately net asset value.”  Interestingly enough, that net asset value was not disclosed, although Occidental disclosed that its net investment would come to about $250 million.

Phibro is the oil and gas trading unit that had the unbelievably high bonus issue over the potential $100 million payout that had been the topic of much debate.  Its assets consist of cash, marketable securities and “readily saleable commodity positions.”  Andrew Hall, the trader of much controversy, over how much should be paid out in bonuses, and the Phibro employees will remain at Phibro after the acquisition is closed.

The press release noted that senior management has agreed to make a significant investment in Phibro and receive returns dependent upon future performance.  The company noted that significant portions of current and future bonuses will be deferred and retained by Phibro and paid out in future years.  In short, to get around the issue of public outcry over performance-based bonuses those massive payouts due are effectively being reinvested in Phibro and will probably have contingencies on future performance.

From 1997 until the second quarter of 2009, Phibro averaged about $200 million per year in pre-tax earnings from 1997 to 2009, but it averaged about $371 million per year over the last 5 years.  It was also noted that Phibro was profitable every year since 1997, and it was also profitable in 80% of the quarters.

The deal is expected to close by year-end and Phibro will become a part of Occidental’s midstream segment, which includes its natural gas liquids, power, pipeline and existing trading business.

What the bonus payments happen to be are now longer any problem of Citigroup.  Citi shares are down 0.6% at $4.62 and Occidental shares are down 0.3% at $79.82 right before the open.  If you want to know how this relates to the overall size of Occidental, its 2008 revenues were $24.48 billion, and the net income for holders was listed as $6.857 billion.

JON C. OGG
October 9, 2009