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Citigroup Raises Offer for Japan's Nikko by 26% to $13.4 Billion

Reuters
Tuesday, 13 Mar 2007 | 6:26 AM ET

Citigroup raised its offer for Nikko Cordial by 26% to $13.4 billion on Tuesday, after Tokyo Stock Exchange's decision not to revoke the brokerage's listing sharply boosted the value of its shares.

Citigroup said in a statement it would pay 1,700 yen a share for Nikko, Japan's third-biggest securities firm, compared with an initial offer of 1,350 yen announced last week. It will initiate a formal tender offer "as soon as is practicable," it said.

Shares in Nikko jumped to more than 10% above Citigroup's original offer price on Tuesday in response to the exchange's surprise decision a day earlier to keep the brokerage on its rolls despite an accounting scandal.

The shares ended at 1,490 yen, up 6% from Monday and the highest close since December, when the the accounting mess prompted the bourse to begin a review of Nikko's listing status.

"Citigroup revised the price for its planned tender offer following the decision of the Tokyo Stock Exchange, Osaka Securities Exchange and Nagoya Stock Exchange to return Nikko Cordial's shares to normal trading status, an action which significantly improves Nikko Cordial's outlook and prospects," Citigroup said in the statement.

New Offer

Its new offer values Nikko at roughly 1.578 trillion yen ($13.43 billion).

Even before the bourse's decision weakened Citigroup's leverage over shareholders, a group of North American investment funds that together own about 25% of Nikko had complained
that the initial offer undervalued the firm by a third or more.

Natsumu Tsujino, an analyst at JPMorgan, calculated that the underlying value of Nikko's various businesses -- which include retail and wholesale broking, investment banking, asset
management and principal investments -- suggests Nikko is worth 1,440 yen a share.

A different valuation using Nikko's latest quarterly earnings would imply a fair-value price of 1,530 yen per share, she said.

Citigroup's new offer gives a premium to both those valuations, though it still falls short of the 2,000 yen a share that the investment funds have said Nikko is worth.

Citigroup announced its initial bid price a week ago, when the likelihood of a delisting appeared high. Had Nikko been evicted from the exchange, its shares would have been vulnerable
to another sharp fall had the buyout fallen through.

Citigroup insisted as late as Monday that it would stick to its original offer, but in the end it faced a stark choice: raise its bid or give up on a deal that it had touted as key to its resurgence in Japan, where it has incurred heavy losses in recent years.

Nikko's management has agreed to the Citigroup deal, which if successful would be the U.S. bank's biggest-ever acquisition in Asia and the largest foreign buyout in Japan.

Shares Back to September Level

Nikko has now recouped all the share-price losses it had incurred since the accounting mess came to light in December. The stock climbed as high as 1,509 yen on Tuesday, its highest
intra-day level since last September.

The threat of a delisting had spooked Nikko's clients and prompted credit rating agencies to downgrade the firm, dragging the stock to a low of 980 yen before reports of Citigroup's
interest emerged.

Standard & Poor's said on Tuesday it would review Nikko's credit rating for a possible upgrade now that the risk of delisting had passed. The other global agencies, Moody's and Fitch, began reconsidering Nikko's ratings after Citigroup unveiled its offer.

Nikko has admitted that managers at its merchant banking unit forged documents as part of an effort to inflate profits from an acquisition. The brokerage has already paid a $4.3 million fine
and top executives including its former president have quit.

The TSE's decision came despite Japanese media reports that bourse officials would conclude a review of scandal-hit Nikko's status by delisting the firm.

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