Citigroup launched a $10.75 billion takeover bid for Japanese brokerage Nikko Cordial on Tuesday, offering cash to the scandal-hit firm's shareholders in a deal designed to transform its business in the world's second-biggest economy.
Citigroup, the largest U.S. bank but a small player in Japan outside of corporate investment banking, said it would pay a 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%.
In a statement, Citigroup said it would offer 1,350 yen for each Nikko share and that acquiring all of the broker's stock would cost about 1.253 trillion yen ($10.75 billion).
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% to 1,340 yen before the
announcement on news that Citigroup was poised to bid.
"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 and Nikko share control of an investment banking joint venture, Nikko Citigroup, 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.
Avoiding Merrill's Mistake
To make the takeover work, Citigroup must succeed where other foreign firms have failed. Merrill Lynch 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.
"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, Japan's second-biggest bank, which like Citigroup owns about 5% of Nikko.
Citigroup's bid for Nikko comes amid a broader effort to revamp its business in Japan, the scene of some of its most painful missteps in recent years.
Citigroup currently earns just one-twentieth of its total group revenues in the country.
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 quietly 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.
Citigroup is set to launch a tender offer for scandal-hit Japanese brokerage Nikko Cordial, a Nikko spokesman said on Tuesday, a potential $5 billion deal that would mark Citigroup's resurgence in Japan.