[lbo-talk] Citigroup bids $10.8 bln for broker Nikko Cordial

uvj at vsnl.com uvj at vsnl.com
Sun Mar 11 05:12:01 PDT 2007


Reuters.com

Citigroup bids $10.8 bln for broker Nikko Cordial http://www.reuters.com/article/ousiv/idUST32984120070306

Tue Mar 6, 2007

By Jonathan Soble

TOKYO (Reuters) - Citigroup (C.N: Quote, Profile, Research) bid $10.8 billion for Japan's scandal-hit Nikko Cordial Corp. (8603.T: Quote, Profile, Research) on Tuesday, hoping to secure its biggest Asian deal and mark its resurgence in the world's second-biggest economy.

Citigroup, the largest U.S. bank but a small player in Japan outside of corporate investment banking, is making a broader effort to revamp its business in Japan, the scene of some of its most painful missteps in recent years.

To make the takeover work, Citigroup must succeed where other foreign firms have failed. Merrill Lynch (MER.N: Quote, Profile, Research) tried to build a Japanese retail broking business on the ruins of Yamaichi Securities, a Nikko rival that collapsed in 1997, but the business folded a few years later after losses peaked at an estimated $500 million in 2001.

"Citi and Nikko already have a deep relationship so it should be a good cultural fit," said Neil Katkov of Celent, a financial consultancy. "It really puts a foreign player right into the middle of the brokerage industry in Japan."

Citigroup said it would pay a small premium to Nikko's closing price on Tuesday to lift its stake in Japan's third-largest securities firm from just under 5 percent to at least 50 percent.

Citigroup said it would offer 1,350 yen for each Nikko share and would acquire all shares tendered, which would cost it about 1.253 trillion yen ($10.8 billion). It plans to start the offer within a week from Tuesday. The deal is Citigroup's largest in Asia to date, eclipsing its $2.8 billion acquisition of South Korea's KorAm Bank in 2004.

The offer price values Nikko at 28 times earnings, compared with 20 at Nomura Holdings Inc. (8604.T: Quote, Profile, Research) and 22 at Daiwa Securities Group Inc. (8601.T: Quote, Profile, Research), Japan's top two brokerage groups, according to Reuters data.

Shares in Nikko, a full-service retail and wholesale broker that has been weakened by an accounting scandal at its merchant banking arm, jumped 14 percent to 1,340 yen before the announcement on news that Citigroup was poised to bid.

EARLY MOVE

Citigroup and Nikko share control of an investment banking joint venture, Nikko Citigroup Ltd., and Citigroup had owned as much as 25 percent of Nikko Cordial after bailing the brokerage out during a financial crisis in 1998. It has since sold most of its holding.

Nikko Cordial, which has 109 retail branches and a market value of 1.3 trillion yen as of the end of trading on Tuesday, said its board of directors had approved Citigroup's offer.

"Merrill entered the market at the wrong time and they bought a business that had already failed," Celent's Katkov said, noting that Nikko's core business turns a profit and Japan's financial markets have picked up from lows at the start of the decade.

Nikko's problems are more immediate. The Tokyo Stock Exchange is deliberating whether to strip it of its share listing over the accounting mess -- Nikko has admitted forging documents and booking about $300 million in excess profits over two years -- and has said it will make a decision in mid-March.

The Nikkei business daily reported last week that the bourse had already decided informally to delist the company.

Citigroup could have scooped up Nikko more cheaply had it waited for a delisting, but analysts said that strategy would also have carried risks.

Nikko's clients and staff might have abandoned the firm had it been delisted before securing a buyer, and private equity funds might even have made a grab for its assets, such as its profitable mutual fund business and companies held by its merchant banking arm.

Citigroup would also have risked being checked by rivals such as Mizuho Financial Group (8411.T: Quote, Profile, Research), Japan's second-biggest bank, which like Citigroup owns about 5 percent of Nikko.

Citigroup currently earns just one-twentieth of its total group revenues in Japan.

In January, the bank said it would close 270 of its separately branded Japanese consumer finance branches, out of a total of 320, after the business suffered $489 million in after-tax losses in the fourth quarter of 2006.

That setback followed the demise of Citigroup's Japanese private bank, which regulators ordered to close in 2004 for violations including loose controls against money laundering.

Citigroup Chief Executive Charles Prince, who took over after the private banking scandal, has visited Tokyo three or four times a year to smooth things over with regulators, a senior Financial Services Agency official has said.

In addition to bidding for Nikko, Citigroup is seeking a bigger retail banking profile in Japan, announcing in January that it would double the number of its branches to 60.

(Additional reporting by Edwina Gibbs, Eriko Amaha and Nathan Layne)

($1=116.52 Yen)

© Reuters 2007. All rights reserved.



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