THE HIGH STAKES OF CITIBANK'S CPA BID

UNCLAS SECTION 01 OF 02 ALGIERS 001638 SIPDIS SENSITIVE SIPDIS CASABLANCA FOR USFCS RORTIZ CAIRO FOR TREAS ASEVERENS COMMERCE PASS TO JREITZE E.O. 12958: N/A TAGS: ECON EINV EFIN PREL AG SUBJECT: THE HIGH STAKES OF CITIBANK'S CPA BID SENSITIVE BUT UNCLASSIFIED -- NOT FOR INTERNET DISTRIBUTION. ¶1. (SBU) SUMMARY: Citibank is the sole American bank bidding on the privatization of the state-owned bank Credit Populaire d'Algerie (CPA). Competition is considered stiffest from the two leading French banks, Societe General and BNP. Citibank may find itself disadvantaged by its recent announcement of a massive reduction in profits and the resulting turmoil over the company's leadership, and there is a chance that these factors may cause Citibank to pull out of the Algerian bid altogether. Meanwhile, a recent Algerian government rule change may delay the bidding process by another quarter or more. We expect continued aggressive advocacy by the French government, including President Sarkozy in person when he visits in December. If Citibank remains in the running, we recommend strong USG support and advocacy on its behalf. END SUMMARY. A KEY MOMENT FOR ECONOMIC REFORM IN ALGERIA -------------- ¶2. (U) CPA is one of five state-owned banks in Algeria (which control 95 percent of the country's banking sector),and the first of three slated for privatization. With a 13-percent domestic market share, CPA is the fourth-largest bank in Algeria by both net income and assets, with total assets reaching almost six billion dollars in 2005. Given its customer base of 770,000 and its 140 branches, CPA is considered to be a strategic purchase by the leading foreign banks interested in quickly expanding their presence and holdings across Algeria. By all accounts, Citibank is facing stiff competition from the French in its bid to buy a 51-percent interest in CPA. ¶3. (U) Citibank is the only American institution of the six banks short-listed to bid on CPA, and most agree that its main rivals are the French firms BNP Paribas (BNP) and Societe Generale (SocGen),both of whom have been expanding in Algeria since 2006. The first phase of the bidding process -- submission of technical offers -- is currently scheduled to close sometime around November 20. Bidders whose submissions receive a score of 80 or higher will then be invited to submit financial offers, which will reveal their offering price for the bank. THE BUMPY ROAD THUS FAR -------------- ¶4. (SBU) The bidding process has already been delayed since February, and news reports indicate that a recent rule change allowing state-owned enterprises to use private banks for the first time since 2004 (septel) will cause the bidding to be delayed again until the first half of 2008. We believe the Algerians want the bidders to re-evaluate CPA and adjust their offers upward in light of the rule change, which will allow CPA to retain its parastatal customers even after privatization. Citibank's Managing Director for Algeria, Kamel Driss, told us in early November that he in concerned that the GOA may consider his firm's recent $5.9 billion write down and resulting profit slides, along with the subsequent resignation of its CEO, as weakening its CPA bid. He stressed that all major banks, including Citibank's French competitors, are faced with the same problems associated with sub-prime loans. However, Driss also said that prior to its leadership shakeup, Citibank senior management had been distracted by the bank's sub-prime dilemma and drop in share price. He said that company executives recently met in New York specifically to review the CPA proposal, in part because Citibank's former CEO was often accused by his detractors of expanding the bank's international operations too quickly. FRENCH INFLUENCE REMAINS STRONG -------------- ALGIERS 00001638 002 OF 002 ¶5. (U) We have received reports from numerous sources that the French government is lobbying hard for both BNP and SocGen. Jamel Djerad, an Algerian consultant and chief of staff to the Algerian prime minister during the late 1980s and early 90s, told us that SocGen remains interested in buying BNP and, with that potential merger in mind, French officials and influential citizens feel free to lobby for either bank in order to ultimately reach the same result. Djerad added, however, that SocGen has stronger support than BNP among the French elite and power base, including President Sarkozy, who is expected to advocate for the French banks during his state visit to Algeria in early December. Djerad asserted that key Algerian government players favor SocGen, and noted that the bank's development director frequently flies to Algiers by private jet -- a luxury highly restricted by the Algerians -- to meet with President Bouteflika. He also expected, however, that a delay in the bidding was likely because of an ongoing disagreement between President Bouteflika and other power brokers over whether sale of CPA would be better accepted publicly and better serve the privatization process if the buyer were an American or French firm. CITIBANK'S OFFER -------------- ¶6. (SBU) With this privatization, the Algerian government expects new investments in banking technology, expanded banking services to the public, creation of new jobs, and the recovery of outstanding credit on non-performing loans. In its technical offer, Citibank will stress its experience in acquiring over 100 firms in the last five years, its provision of English-language technical training, and its record of using the process to offer a full range of consumer financial products and high quality training to the employees of the acquired firm. Citibank's technical offer will include assistance in forming a credit bureau in order to improve risk analysis, governance and banking controls. Citibank also says it will expand consumer banking and lending for small to medium-sized enterprises (SME). In the end, Citibank is counting on its track record of being the only foreign bank willing to invest and lend in Algeria during the years of terrorism in the 1990s, together with the fact that it is the largest foreign and private bank in Algeria in terms of assets. COMMENT: MORE THAN JUST A BANK -------------- ¶7. (SBU) We feel strongly that the USG should support and advocate for Citibank's CPA bid not only because it is the sole U.S. company in the running, but because a Citibank-owned CPA would significantly advance our goals of economic and financial reform in Algeria. With such an acquisition, Citibank would be able to inject a level of professionalism, transparency and best practices into a significant portion of the banking sector across Algeria. Further, its stated goal of SME development and its offers of technical assistance with credit risk analysis and banking controls would support the ongoing programming of the Departments of State, Treasury and Commerce. Lastly, given that Citibank's in-house language is English, an expanded Citibank workforce in Algeria, especially in the financial sector, would leverage the English-language programming that the Algerian government frequently asks us to provide. DAUGHTON