In selling Phibro LLC, Citigroup Inc. (C) decided to exit one of its core businesses and sidestep a controversy over compensation that was virtually impossible to win.
Occidental Petroleum Corp. (OXY) will buy Citi's oil-and-gas trading unit at about "net asset value," both companies said. That value wasn't disclosed, although Occidental did say its investment will be about $250 million.
The reason for the sale appeared to be the annual compensation for Andrew Hall, the successful head of Phibro, of $100 million, which generated a firestorm of controversy for a bank getting extraordinary government support during the financial crisis.
Fox-Pitt Kelton analyst David Trone said Phibro???s profits were important to Citi to soak up losses from delinquent loans, but the pressure on limiting compensation left Citi little choice other than to sell it. In addition, the strong market for commodity trading makes it an opportune time to sell.
Citi has been shrinking at the urge of government regulators. Those operations that didn???t fit with its new focus on clients, instead of proprietary trading, were included in a newly created Citi Holdings division. Phibro, however, wasn't one of the units originally marked for sale; it remained in the investment banking business that is part of Citi???s core division, called Citicorp.
Citigroup Chief Executive Vikram Pandit conceded last month at a public discussion in New York City that Hall???s compensation was too high for a bank employee, and that Citi was in the process of restructuring Phibro.
In a press release, Citigroup said, ???The decision to sell Phibro was the outcome of an evaluation of a variety of alternatives and is consistent with Citi???s core strategy of a client-centered business model.???
Senior Phibro managers, whom Occidental plans to keep in place along with the rest of the workers, will make a large investment in the company and be paid returns on that investment, depending on how the company performs.
The acquisition combines one of the most hard-charging oil-trading teams with what had been one of the most conservative oil companies. Occidental was one of the rare oil producers that avoided using the futures market even to lock in the advance sale of its crude, a widespread practice known as hedging. Now, the company is an instant global leader in the trading world, alongside giant international oil companies like BP PLC (BP, BP.LN) and Royal Dutch Shell PLC (RDSA, RDSB.LN), which have long played the market in addition to hedging.
"They never gambled before, and now they own the casino," said Fadel Gheit, an analyst at Oppenheimer & Co. in New York.
Phibro is escaping the banking sector just before U.S. regulators are set to release draft rules that could severely limit speculative trading in the oil market. As part of an oil producer, which can make a better claim to a business need to use oil derivatives, Phibro will potentially be able to sidestep new regulations.
Phibro's pretax earnings averaged $371 million in the past five years through 2008. The bank added the sale doesn't affect Citi's client-facing commodities business lines.
Having highly paid talent isn't new for Occidental. Chairman and Chief Executive Ray Irani received $49.9 million in direct compensation last year, according to a Wall Street Journal survey. He received more than $200 million in 2007 from long-term incentive awards and by exercising stock options granted in prior years.
Citigroup shares were down less than 0.4% in morning trading; Occidental shares rose 0.7%.
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