March 3, 2015 / 12:17 PM / 2 years ago

Springleaf to buy Citi's OneMain to become top U.S. subprime lender

A Citi sign is seen at the Citigroup stall on the floor of the New York Stock Exchange, October 16, 2012.Brendan McDermid

(Reuters) - Springleaf Holdings Inc LEAF.N said it would buy Citigroup Inc's (C.N) OneMain Financial Holdings Inc for $4.25 billion in cash, creating the largest subprime lender in the United States.

Citigroup has been seeking to hive off OneMain since at least 2011 as part of the No. 3 U.S. bank's plan to sell unwanted assets and focus on wealthier clients.

The deal will create a lender with $15 billion in assets and nearly 2,000 branches, serving the large and growing population of non-prime customers in the United States.

Springleaf shares soared 38 percent to a record $52.44 on Tuesday. Citigroup's shares were marginally higher at $53.73.

The deal with Springleaf for Citi's most profitable business was widely expected, but the price was less than what many analysts had anticipated. Reuters reported on Feb. 20 that the deal was close.

Jefferies & Co, reiterating its "buy" rating on Springleaf's stock, said it had expected OneMain to fetch $5 billion.

OneMain, which provides loans to meet unexpected expenses and to buy small-ticket items, has been profitable since posting a $2 billion loss in 2010. Profit rose 7 percent to $415 million in the nine months ended September.

OneMain has 1,140 branches in the United States, compared with Citibank's 849.

Citigroup said it will use a part of the sale proceeds to retire certain funding that supports Citi Holdings.

The combination of the debt retirement and the remaining proceeds is expected to add about $1 billion to Citi's earnings before income taxes.

OneMain is part of Citi Holdings, created during the financial crisis to park assets that Citigroup wanted to divest or wind down.

Citigroup had reduced Citi Holdings' assets to 5 percent of total assets in 2014 from a peak of more than 30 percent.

OneMain had filed to go public in October. Citigroup had always preferred an outright sale, but was unwilling to sell at the prices offered and potential buyers had trouble raising funds.

The combined company is expected to earn $800-$900 million in 2017, Springleaf CEO Jay Levine said on a call.

Springleaf is majority owned by Fortress Investment Group LLC (FIG.N), whose shares rose 2.7 percent.

Bank of America Merrill Lynch, Barclays, Credit Suisse and Goldman Sachs are Springleaf's financial advisers, while Skadden Arps Slate Meagher & Flom LLP is legal counsel.

Citi is OneMain's financial adviser and Davis Polk & Wardwell is its legal adviser.

Editing by Savio D'Souza

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