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Citigroup, Legg talks might be nearing end


Legg Mason Inc. and Citigroup Inc. appear to be in the final stages of negotiations over swapping divisions that would be carved from both financial companies, Wall Street analysts and industry experts said.

The companies have reportedly been in talks for several weeks, although tight-lipped officials with Legg Mason and Citigroup have declined to comment publicly. The situation has left employees, clients and shareholders on tenterhooks.

Some observers say they are confident a deal is near fruition. It would be the largest ever undertaken by Legg Mason and could mean the Baltimore-based firm more than doubles its respected investment management business by acquiring as much as $460 billion in investor assets. In return, Citigroup would get Legg Mason's network of more than 1,500 brokers. If that happens, Legg Mason Chairman and Chief Executive Officer Raymond A. "Chip" Mason would complete a transformation of the 106-year-old firm from a brokerage to a money manager - while risking a potential culture clash when Citigroup's business is melded into Legg Mason's.

"It's highly likely that there are very serious negotiations going on, and I think it would be an extraordinarily successful move for Legg Mason," said Burton J. Greenwald, a consultant to the mutual fund industry in Philadelphia. "But it will be a real challenge for them to integrate this."

Mason didn't return a phone call seeking comment. He canceled a speaking engagement at an investor conference two weeks ago, just days after the talks were first reported. "We're not commenting," a Legg Mason spokeswoman said.

Analysts cautioned that an agreement may not be reached and that negotiations can fall apart at any time, regardless of how close the two sides come to an accord. That uncertainty, however, hasn't squelched speculation over the nuts and bolts of a potential transaction.

Some analysts say Legg Mason is only angling for Citigroup's Smith Barney and Salomon Brothers mutual funds, which hold more than $50 billion. Legg Mason's largest acquisition to date was its 2001 purchase of Private Capital Management, which at the time managed about $8 billion for wealthy clients.

Others say Legg Mason is "interested in as much as they can get," as Greenwald put it. In financing the larger of the rumored deals, Legg Mason would give up its brokerage, transfer a sizable ownership stake in the company, and pay a lump sum of cash, according to analysts who have run the numbers. Citigroup's entire asset-management business could be valued at $4 billion to more than $6 billion.

One financing model, crunched by Merrill Lynch's Guy Moszkowski, envisions Legg Mason taking on $1.25 billion in corporate debt, paying $700 million in cash and issuing 36 million shares to Citigroup. He estimates the value of Legg Mason's brokerage at $1.5 billion, which is less than what other analysts have calculated.

A "favorable" swap could push Legg Mason's stock to $100 a share in a year, according to Buckingham Research Group. That's because Legg Mason's annual cash earnings, which don't include expenses such as depreciation, would be about $735 million by 2007, the research group predicted. Legg Mason's operating income in the last fiscal year was about $660 million.

Legg Mason's stock closed at $85.20 after falling 41 cents yesterday. Stock in New York-based Citigroup, the largest financial services company in the world, rose 12 cents to close at $47.44.

With the deal, Legg Mason would be solely focused on managing investments, which usually brings in more steady income than dispensing financial advice through brokers. The firm also would eliminate potential conflicts of interest that arise from dispensing financial advice while selling its own mutual funds.

But some say the risks in trying to pull off such an enormous acquisition might be too great.

"Legg Mason's performance has been exceptional in terms of its funds, and you wonder if doubling the size of their assets under management would be disruptive to their current culture," said Mark Batty, a financial services analyst for PNC Advisors, which owns shares in Legg Mason and Citigroup. "They haven't done a deal of this magnitude before."

Batty also said that by ridding itself of brokers, Legg Mason loses a direct relationship with clients; some who have invested in Legg Mason funds through the firm's brokers may decide to go elsewhere.

"I would actually prefer to see the deal not happen," he said.

Chris Traulsen of Chicago-based Morningstar Inc., which tracks mutual funds, said a "culture clash" could happen if Citigroup's funds are brought into Legg Mason funds, because some have similar investment styles and directly compete in luring clients now. But structuring the merger that way would be a departure from Legg Mason's past acquisitions. Legg Mason typically acquires companies and allows them to operate almost autonomously.

"There are lots of questions as to how this would all work," Traulsen said.

The Legg Mason-Citigroup negotiations "are the worst-kept secret out there," he added. "Hopefully, they'll figure it out one way or another."

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