$3.7 billion deal to help companies gain focus; smooth transition expected

BALTIMORE - Citigroup Inc., the world's largest financial-services company, took another step back from a one-stop "financial supermarket" in a $3.7 billion deal announced Friday to swap most of its asset-management business for the broker-dealer business of Legg Mason Inc.

Investors with Legg Mason mutual funds shouldn't see much change from the deal, and while there could be minor hassles for Citigroup customers, analysts and company officials said they expected a largely painless transition.

The deal with Citigroup also involves Legg Mason stock and a loan to the Baltimore financial-services company.

Legg Mason, which started as a retail brokerage firm in 1970, will now focus solely on managing assets, becoming the fifth-largest U.S. asset manager, said CEO Raymond "Chip" Mason.

Legg Mason's brokerage work force of about 1,300 will move to Citigroup, giving the New York-based company more than 14,000 brokers.

"For the consumer, at the end of the day, it should be a better deal," said David Haas, an analyst with Fox-Pitt, Kelton. "There will be more of a consumer choice for top performing managers."

Legg Mason will distribute its asset management products through Smith Barney's broker force, Citigroup Private Bank, Citibank's 2,000 branches, CitiStreet and Citigroup's Primerica operation.

The deal is expected to change both companies. It will transform Legg Mason from a regional brokerage into a money management powerhouse. It allows Citigroup to further withdraw from the "financial supermarket" model of the 1990s, lowering its total number of products while focusing its resources in areas where the company has competitive strengths.

Citigroup also eliminates potential conflicts of interest that can arise when brokers sell their company's own mutual funds, thereby earning more than they could by pushing a potentially better fund offered by a competing company.

In a separate statement, Legg Mason also said it will acquire an 80 percent stake in Permal Group, one of the world's largest hedge-fund investors, from Sequana Capital and Permal Group management, for at least $961 million in an agreement worth up to $1.39 billion. The firm also will have the option to purchase the remaining 20 percent over four years.

Shares of Legg Mason rose $13.01, or 15.3 percent, to close at $98.00 on the New York Stock Exchange. Citigroup rose 7 cents to close at $46.95 on the NYSE.