Citigroup Inc. |C
Citi preferred |C.P

Deal value $58 billion

Spread 06/15/09 $3.85, or 18.5%

Citigroup Inc. reached a definitive agreement with the U.S. government for its exchange offer of $58 billion of preferred shares for common. The registration statement for the offer should clear the Securities and Exchange Commission by this week.

Citigroup shares have been difficult to borrow for short selling, which has made the arbitrage for the exchange offer challenging. The clearing of the proxy should open up a when-issued market for the Citi shares that would be exchanged for the preferred.

That might provide opportunity in the arb trade. The when-issued shares would not be covered by the uptick rule and so would be easier to short, if available.

Treasury and the Federal Deposit Insurance Corp. had to sign off on the definitive agreement on the exchange offer, which should provide a fair amount of comfort to the deal at this stage.

The exchange ratios for the preferred issues vary by their liquidation preferences. The series F and AA shares, which are publicly traded, will each be converted into 7.30769 Citi shares. Those shares traded for roughly $20.80 and were worth $24.60 in the offer, which put the spread at roughly $3.85, or 18%. Citi expects to close the offer July 24.

IPC Holdings Ltd. |IPCR
Validus Holdings Ltd. |VR

Deal value $1.6 billion

Spread 06/15/09 $1.25, or 4.4%

Shareholders of IPC Holdings Ltd. voted down the amalgamation agreement with Max Capital Group Ltd., which opens the insurer to a likely deal with spoiler bidder Validus Holdings Ltd.

IPC Holdings, while in a deal with Max, has been dogged by fellow Bermuda-based, short-tail insurance company Validus with its outstanding bid of 1.1234 of a Validus share plus $3.75 cash for each IPC Holdings share.

The public bidding war has been partly a debate over whether a combination of IPC with Validus would increase risk for IPC shareholders. The Max deal was presented as a diversification from property catastrophe insurance.

IPC Holdings did go through a nine-month process of exploring strategic alternatives and considered liquidation. At that time, Validus was not approached, so it did not exhaust all possibilities. But IPC has been in a public bidding war for several months without attracting bids other than from Validus.

The companies were in talks last week, but Validus said it would seek to replace IPC board members. IPC Holdings said it required a collar, some material-adverse-change protections and a go-shop from Validus. It also suggested that a price of $35 per share, its projected book value, was appropriate.

IPC Holdings agreed to sell to Max Capital at 70% of book value, one source says. The company shopped around and considered a runoff of the business at about $27 per share, so it has fully explored alternatives, a source says. If another bidder will pay $35 per share, it will win the company, he says, adding that this was an unlikely outcome.