May 24 (Reuters) - Citigroup Inc (C.N) scrapped the $7-billion sale of its Mexican consumer unit, known as Banamex, and plans instead to pursue an initial public offering, it said on Wednesday. The sale process, which was abandoned at a time of rising political uncertainty, is a blow for Citigroup as it seeks to streamline its business.

The IPO is expected to be completed in 2025, the company said. Citi is considering a dual stock listing, possibly in Mexico City and New York, two sources familiar with the matter said.

But it remains unclear what investor appetite would be for such a deal especially given the Mexican government's opposition to sweeping layoffs that could be needed to make the unit, known as Banamex, more competitive.

Citi shares slumped 2.9%.

"The market is disappointed,” said Stephen Biggar, banking analyst at Argus Research. "The rationale for selling the unit was, it wasn't strategic, it adds volatility ... Investors are going to have to live with that now until the IPO.”

Citi and Mexican billionaire German Larrea's conglomerate Grupo Mexico (GMEXICOB.MX), which had been in talks to buy Banamex for around $7 billion, mutually decided to abandon the deal in light of the bidder's spat with the government, according to another source with knowledge of the matter.

Tensions between the mining group and Mexican President Andres Manuel Lopez Obrador had been on the rise after the latter moved on Friday to expropriate part of one of the company's rail lines.

The leftist president has been outspoken since Citi announced plans to sell Banamex, insisting the bank remain in Mexican hands and that any new owner not be allowed to cut costs through layoffs.

After Citi announced on Wednesday that it had taken a sale off the table, the president suggested the Mexican state could participate in such a deal, adding the government could have up to $3 billion at its disposal.

Shares in Grupo Mexico, some of whose investors had been mystified about the synergies between a mining group and a bank, surged more than 6%.

In mid-May, amid speculation the deal was in its final stages, Lopez Obrador had said in a press conference there "was no problem" with Grupo Mexico buying the business.

Citi had announced plans to offload the unit more than a year ago as part of a strategic overhaul by CEO Jane Fraser.

"The good news is that Mexico's stock market may have another listed bank, although Citi's ability to pull off an IPO of its Mexican consumer banking operations at a decent price remains to be seen," said Damian Fraser, former CEO of Swiss bank UBS’s Mexico operations. "The bad news is that in the end no one wanted to buy Banamex."

Mark Mason, Citi's CFO, said the decision "allows us to resume a modest level of share buybacks this quarter."

The share repurchases may cheer investors, said Christopher Marinac, director of research at Janney Montgomery Scott.

"They have freed up a little bit of capital," Marinac said. "In the big picture, doing some buybacks was important."


Fraser said in a statement the bank had decided an IPO would be the best path to "advancing our goal to simplify our firm."

Recent complications on the sale process weighed on the decision, including the Mexican government's demands and other factors, said a person with knowledge of the matter who declined to be identified because the discussions were private.

Banamex was acquired for $12.5 billion in 2001, while the latest negotiations valued it around $7 billion.

Citigroup first announced in January 2022 it would exit Mexico, ending its 20-year retail presence in the country.

Fraser had met with Lopez Obrador in February.

Since announcing it would exit consumer businesses in 14 markets in Asia, Europe, the Middle East and Mexico, Citi has completed sales in seven markets, including Australia, Bahrain, India, Malaysia, the Philippines, Thailand and Vietnam. It is also winding down consumer businesses in China and Korea, and its overall business in Russia.

Reporting by Niket Nishant and Saeed Azhar in Bengaluru; Editing by Arun Koyyur

Our Standards: The Thomson Reuters Trust Principles.

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