Citigroup to Pay $7.7 Billion for Nikko Cordial Stake

By Takahiko Hyuga

April 27 (Bloomberg) -- Citigroup Inc. acquired 61 percent of Nikko Cordial Corp., Japan's third-biggest brokerage, falling short of the shares it needs to take full control.

Nikko stock rose to 1,738 yen, more than Citigroup offered, as the U.S. company said it may seek more shares. Citigroup will pay 920 billion yen ($7.7 billion) in cash to Nikko shareholders who accepted the bid, it said today in a statement.

Citigroup must raise its stake to two-thirds to be able to merge or sell units without the consent of other shareholders. Chief Executive Officer Charles Prince, under pressure from investors to boost profit and the company's share price, gains more than 100 branches in Japan, adding to acquisitions in China and Taiwan over the past six months.

``Investors are probably betting Citigroup will seek that additional 6 percent stake,'' said Junichiro Sano, chief executive officer of Dalton Investments in Tokyo. ``Citigroup must have two-thirds majority to proceed with reforms such as divestitures of affiliates.''

Citigroup, the world's biggest financial-services company by market value, has been stymied by overseas shareholders including Harris Associates LP and Orbis Investment Management Ltd., who refused to sell their stock at the 1,700 yen offer price. Foreign investors controlled about 65 percent of Nikko as of March 31.

Co-Investors

David Herro, chief investment officer for international equities at Chicago-based Harris Associates, in an interview this week said the fund is ``content to be co-investors with them in Nikko Cordial'' unless Citigroup raises the offer. Harris owns about 5 percent of Nikko.

``We couldn't purchase all outstanding shares but we will look to increase our holdings,'' Citigroup said. Nikko shares rose 2.8 percent at the 3 p.m. market close in Tokyo.

Citigroup raised its bid from 1,350 yen a share on March 13. Gaining control of Nikko will give Citigroup 109 branches in the world's second-largest economy, narrowing a gap with Mitsubishi UFJ Financial Group Inc, Japan's biggest bank.

The takeover will also enable it to expand investment banking operations in Japan through its joint venture with Nikko, as well as offer services such as wealth management to Nikko's customers, which have a combined 40 trillion yen of assets.

Nikko Citigroup Ltd. ranked second last year in advising on Japanese takeovers and third in underwriting stock sales, according to data compiled by Bloomberg.

Banking Venture Hurt

Tokyo-based Nikko in December was accused of padding its earnings, resulting in a 30 percent drop in the company's stock price in the seven-week period ended Feb. 1. Nikko shares closed at 1,179 yen on March 5, the day before Citigroup announced its initial takeover offer.

The scandal hurt the two companies' investment banking venture. Nikko Citigroup posted a fourth-quarter loss of 62 million yen this week, compared with earnings of 5.1 billion yen in the year-earlier period.

``The accounting scandal hit our investment banking business the most,'' Nikko Chief Financial Officer Osamu Morita told reporters on April 24 at a meeting in Tokyo. ``It will take time to get the business back to normal.''

Canon Inc., the world's largest maker of digital cameras, last month said it may replace Nikko as principal underwriter. Nikko Citigroup, which was one of three arrangers of an initial public offering by Japex, the nation's second-biggest oil explorer, was excluded in February from underwriting a secondary share sale.

Asia Earnings

Citigroup said in January that it plans to set up a financial holding company in Japan by July, and added that it may seek approval to list its shares on the Tokyo Stock Exchange later this year.

Prince has said he wants to generate 60 percent of profit overseas, up from 45 percent last year. About 20 percent of Citigroup's profit is from Asia, half the ratio of London-based HSBC Holdings Plc.

Citigroup agreed on April 9 to buy Taiwan's Bank of Overseas Chinese for NT$14.1 billion ($426 million) in the third takeover it has announced in Asia since December. That month, it led a group that bought 86 percent of China's Guangdong Development Bank.

Citigroup and Nikko Cordial will hold a press conference at 4 p.m. in Tokyo.

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: April 27, 2007 02:41 EDT