MUFG may use UnionBanCal as M&A platform

TOKYO (Reuters) - Mitsubishi UFJ Financial Group's (8306.T: Quote, Profile, Research, Stock Buzz) $3 billion bid for control of U.S. unit UnionBanCal Corp (UB.N: Quote, Profile, Research, Stock Buzz) is more than just a rare bet by Japan's most conservative lender -- it could mark the start of a broader U.S. expansion by the bank.

As Japan's population ages and the domestic market continues to stall, financial firms in the world's second-largest economy are stuck with a sobering proposition: go abroad or face a slow decline at home.

Mitsubishi UFJ's bid for the 35 percent of UnionBanCal it doesn't already own may be part of a strategy that will include other U.S. acquisitions, analysts said.

MUFG has hinted as much, calling the acquisition a "first step", while a spokesman has said buying out UnionBanCal would allow the Japanese bank greater flexibility in implementing "group strategy" in the United States.

Critically, sources at MUFG have told Reuters the Japanese bank wants to establish its own stronghold in the U.S., rather than just attempting to rule a California bank from Tokyo.

Since MUFG's bid this week, a special committee of UnionBanCal's directors responded by saying the offer of $63 per share undervalues the bank, and is not in the interests of its minority shareholders.

Taking full control of UnionBanCal would allow MUFG to use the California lender to buy other banks without any resistance from minority shareholders, said Hironari Nozaki, a banking analyst at Nikko Citigroup in Tokyo.

"In the case of a large acquisition where there wasn't enough money, MUFG would have to inject capital into UnionBanCal and minority shareholders would complain about seeing their stakes diluted," he said.

Nozaki reckons MUFG is likely to purchase a U.S. commercial bank, something the bank itself has said it would consider.

A senior executive told Reuters in an interview last year MUFG could buy a commercial bank in the United States or Europe if the right opportunity came along.

TOP-DOWN BANKING

The current independence of UnionBanCal's board may also present a problem for bankers at MUFG, who are used to the rigid, top-down style of Japanese banking.

"(UnionBanCal) operates in a very independent manner," said Neil Katkov, senior vice president of Asia research at the consulting firm Celent.

"Its board is quite independent, I think, so it would certainly make a difference to make it a 100 percent subsidiary. It will make it easier to implement any strategies such as growth strategies."

Of UnionBanCal's 18-member board of directors, only three are MUFG executives, according to the U.S. bank's Internet site.

Making UnionBanCal a wholly-owned subsidiary would boost MUFG's bottom line by about 20 billion yen ($181.7 million) a year, Nomura Securities estimates.

While that is just 3 percent of MUFG's full-year forecast, it would still provide an extra cushion to fund further M&A. It would also give the Japanese bank full control of a lender with critical knowledge of the local market.

Japanese firms have been increasingly looking to expand overseas, given the poor outlook for growth at home.

Tokio Marine Holdings (8766.T: Quote, Profile, Research, Stock Buzz), Japan's largest property and casualty insurer, said last month it would buy U.S. insurer Philadelphia Consolidated (PHLY.O: Quote, Profile, Research, Stock Buzz) for about $4.7 billion -- the largest U.S. acquisition by a Japanese financial firm.

In March, Tokio Marine completed the purchase of Lloyd's of London insurer Kiln Ltd for 442 million pounds ($824.2 million) to boost its European presence.

Japan's drug and food firms have also pushed overseas, with Takeda Pharmaceutical Co (4502.T: Quote, Profile, Research, Stock Buzz) paying $8.1 billion for U.S. biotech firm Millennium Pharmaceuticals -- the biggest cross-border deal by a Japanese firm this year, according to Thomson Reuters data.