Second Nikko Shareholder Dismisses Citigroup Offer

A second U.S. investment firm dismissed Citigroup's $10.8 billion buyout offer for Japanese brokerage Nikko Cordial as far too low, pressuring the U.S. bank to sweeten its bid.

Nikko's stock rose to trade 4.4% above Citigroup's offer price after Tennessee-based Southeastern Asset Management, Nikko's third-biggest shareholder, said the brokerage was worth at least 48% more.

Investors hoping for a better deal have kept Nikko's shares above Citigroup's 1,350 yen a share offer price since the bank unveiled its bid on Tuesday. If successful, the acquisition would be Citigroup's largest in Asia and Japan's biggest foreign buyout to date. The shares rose 3% to 1,410 yen on Friday.

If enough investors object to the deal, it could force Citigroup to cough up more cash. Some analysts, though, said shareholders may choose to sell rather than risk Citigroup walking away at a time Nikko risks losing its stock listing over an accounting scandal.

"The only way they would raise the offer is if enough shareholders complain. Just because a couple of shareholders are squawking doesn't mean they'll get what they want," said Jon Fisher, senior portfolio manager at Fifth Third Asset management in Minneapolis.

Southeastern, which manages about $40 billion through its Longleaf Partners funds and owns a a 6.6% stake in Nikko, followed the top shareholder, Harris Associates, in dismissing the Citigroup offer.

Chicago-based Harris owns roughly 7.5% and has told media it also thinks Nikko is worth 2,000 yen per share.

"We believe that the price is not sufficient and that the company is worth at least 2,000 yen per share," Southeastern Vice President Andrew McCarroll said in a statement.

Citigroup and Nikko declined to comment.

Nikko's management has agreed to the takeover.

Offshore Holdings

Offshore investors together own about 60% of Nikko. Many bought their stakes after Nikko's shares plunged over revelations that it had forged documents and artificially boosted profits.

The accounting mess cost Nikko a $4.3 million fine, led to executive resignations and prompted the Tokyo Stock Exchange to review its listing. Without Citigroup's support, Nikko's shares would be vulnerable to a fall if the exchange decides to remove the firm from its trading rolls.

The TSE has said it will rule on Nikko's fate by the middle of this month, and Japanese media have reported that bourse officials have already decided informally to delist the firm.

A bid of 2,000 yen per share would price Nikko in line with its peers at about 2.4 times book value. Such a price would at least partly disregard the delisting threat as well as damage to Nikko's reputation from the accounting mess.

Citigroup's offer prices Nikko at about 1.6 times its book value, according to Reuters data, compared with 2.3 times for Nomura Holdings, Japan's biggest brokerage, and 2.6 times for second-ranked Daiwa Securities Group.

Natsumu Tsujino, a brokerage analyst at JPMorgan in Tokyo, puts Nikko's underlying value at 1,440 yen per share based on the worth of its various businesses, which include retail broking, investment banking, asset management and principal investments.

Citigroup now owns just under 5% of Nikko and has proposed to buy all shares tendered, but has set its minimum target at 50% of the brokerage's outstanding stock and has reserved the right to cancel the offer if it fails to secure majority control.

The bank, which is Nikko's partner in an eight-year-old investment banking venture, plans to initiate a formal tender offer by next Tuesday.