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Citi to bring Egg back to the boil

Muted cheers across the City after UK insurer Prudential eventually offloaded its loss-making Internet banking operation Egg to Citigroup for £575 million (Prudential sells Egg to Citigroup). The price, at twice book value, is not bad (UK banks typically sell at 1.5 times book value), but it’s a far cry from the £1.1 billion price tag attached to the bank when it delisted from the Stock Exchange last year.

The acquisition gives Citi a sizeable presence in the UK market – Egg has over 3 million customers – and a well-established brand. But as a stand-alone phone/Web bank, Egg continues to operate at the margins in comparison to its high-street rivals.

Furthermore, its business model appears increasingly fragile, comprising the provision of high interest savings accounts to fickle rate tarts, and over-reliant on a credit card portfolio vulnerable to rising delinquency rates. Pru expects Egg to report losses of £145 million for 2006 following a sharp rise in personal bankruptcies, unpaid personal loans and credit card bills.

Of course, Citi may be happy to just sit back and milk the scale values and cross-sell conversion opportunities attached to the purchase, but I suspect we’ll see a slightly more aggressive approach to Egg’s business development and a keener focus on implementation and delivery.

The Internet bank paid a heavy price for an ill-advised overseas expansion strategy a few years back, but this may yet be where its future potential lies. ING Direct is the role model here. Who knows? With Egg's direct distribution and instant fulfillment capability aligned to Citi’s international outreach network, it might even succeed.

One to watch.

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