CITI’S BITTER PILL

On the same day that embattled banking giant Citigroup laid the groundwork to dilute investors’ current stakes by converting $58 billion worth of preferred shares into common stock, the bank also put in a place a poison pill designed to protect a massive tax benefit.

The bank contends the poison pill was created to keep safe $43 billion in tax benefits available to Citi over the next 20 years that would have been jeopardized had an investor amassed more than a 5 percent stake in the hobbled financial titan.

The company stressed the move has less to do with blocking a takeover attempt.

A poison pill is a mechanism by which the company protects itself from a takeover attempt by triggering sales of shares to investors in order to dilute the stake of an aggressor.

Under Citi’s plan, the poison pill would be triggered if an investor amasses more than a 5 percent stake in the bank. If that threshold is breached, other shareholders could buy shares at a 50 percent discount.

The move comes as Citi inches toward a partial nationalization as it rolls out a plan to convert $58 billion in preferred shares held by Uncle Sam into common stock, which itself will massively dilute current investors by sending the number of Citi shares outstanding up an eye-popping 75 percent.

The conversion will leave the government as Citi’s biggest shareholder at around 34 percent. It will also leave one of Citi’s most ardent supporters — and at one time its biggest shareholder — among the most hurt.

Saudi Arabia’s Prince Alwaleed bin Talal has already been dinged by a sharp decline in Citi’s share price, and now faces the prospect of his investment getting whacked again as a result of the conversion plan.

Alwaleed has poured billions into Citi through his investment entity Kingdom Holdings, even as the bank continued to be beaten down by the credit crisis and received more than $50 billion in rescue cash from Uncle Sam.

The Saudi billionaire owns more than 217 million shares of Citi, which at present are worth $743 million — a stark contrast from three years ago, when his shares were worth around $13 billion.

Citi’s equity swap could flood the market with as many as 17 billion common shares.

In November, during a CNBC interview, Alwaleed expressed confidence in Citi CEO Vikram Pandit and described the possibility of further cash injections by the government as “far-fetched.”

He noted that in his communications with “Mr. Vikram,” as he called the CEO, he was told that the bank had enough capital for the next 12 months to 18 months.

Alwaleed couldn’t be reached for comment.However, the Federal Reserve and US Treasury’s so-called stress test determined that Citi had a $5.5 billion capital hole it needed to fill.

Meanwhile, the engineer of the behemoth supermarket bank, Sandy Weill, who had to give up some of his lavish perks as the former CEO of the bank, also will see his 16.6 million shares, which are worth some $56 million, diluted.

Citi, which has lost more than 82 percent of its value of the past year, closed up 2percent yesterday to $3.48.