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Citigroup has just made its opening salvo in what is sure to be a feeding frenzy in the financial services group this fall:

Wednesday September 6 8:32 AM ET
Citigroup Inc. in $31.1B stock deal to buy lender Associates First Capital

NEW YORK (AP) - Financial services powerhouse Citigroup Inc. (NYSE:C - news) is buying the lending company Associates First Capital Corp. (NYSE:AFS - news) for about $31.1 billion in stock.

The deal announced Wednesday will accelerate Citigroup's global expansion in lending to consumers, giving it control of the largest publicly traded finance company in the United States and the fifth-largest consumer finance company in Japan.

As the owner of Citibank, Citigroup is the biggest bank holding company in the United States and it is a leader in insurance and brokerage services through its Travelers and Salomon Smith Barney operations.

The deal has been unanimously approved by the boards of both companies and is expected to close by the end of the year, pending regulatory and shareholder approval.

Under terms of the deal, Associates First shareholders will get 0.7334 of a share of Citigroup stock for each of their shares. That represents $42.49 US for each Associates First share based on Tuesday's closing price for Citigroup of $57.56 a share.

At that price, Citigroup is paying about a 52 per cent premium over Associates First Capital's closing price of $28 on Tuesday. Both Citigroup and Associates First are traded on the New York Stock Exchange.

Prior to the deal, AFS was selling at 28, or roughly 12 times expected earnings of $2.32.

Methinks $250 billion Citigroup, selling at 22 times earnings, is not quite finished yet.

Let's see:

$42.49/$2.32 is 18.3 times expected earnings for AFS.

USB is expected to earn $2.19 this year, $2.44 next.

At 18.3 times this year's earnings, USB would fetch $40.11.

I'll take it.

Buy Christmas.

Best wishes,
Mark Hirschey
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