Citi-Nikko Cordial Deal Looks Iffy

Big overseas shareholders of Japan's Nikko Cordial want Citigroup to cough up more money for its takeover bid of the brokerage

Big foreign-led takeovers are always a touchy subject in Japan, where such moves are generally frowned upon. Yet the irony surrounding Citigroup's (C) proposed $10.8 billion takeover of Nikko Cordial (NIKOY)—in what would be the biggest foreign acquisition in Japanese corporate history—is that the key dissenters are overseas institutional investors that contend Citi is lowballing them.

As things stand now, Citigroup Chief Executive Charles Prince's Mar. 6 offer for the Japanese brokerage is looking iffy at best. Four of Nikko's biggest institutional shareholders, which collectively control about one-fourth of the brokerage's shares, are demanding a sweetened offer from Citi before they will sign off.

The latest to dissent is Bermuda-based Orbis Investment Management, which is seeking an enhanced bid. Mackenzie Financial of Canada, according to a Mar. 11 report in the Nihon Keizai Shimbun, also thinks Citi's initial offer of $11.42 per share is far too low.

Valid Investors' Concerns

Mackenzie execs in Japan reportedly met with Nikko President Shoji Kuwashima late last week to discuss the deal. Mackenzie backs the plan in principle but believes a price of $14.40-$15.25 is more appropriate, according to the report. Orbis is looking for a bid of just under $17 per share. U.S. investors Harris Associates, based in Chicago, and Southeastern Asset Management have also panned the current offer price.

Analysts say investors have a point. By most measures, Citi's terms aren't particularly generous. Citi's offer price for Nikko Cordial shares gives investors a premium of just 0.75% over the closing price on the day the deal was revealed. It's since risen higher.

At close of Tokyo trading on Mar. 12, Nikko's stock price was around 40 cents higher than Citi's offer price, despite a 0.4% one-day fall. It's also nearly 10% less than the value at which Nikko's stock traded in December. "Without raising the takeover bid price, there will be a great chance Citi will fail," says Yasuhiro Matsumoto, an analyst at Shinsei Securities in Tokyo. "The markup may need to be around 20%."

Decision Not to De-List

Another troubling development for Citi's bid occurred after trading had ended. Contrary to expectations, the Tokyo Stock Exchange announced it had decided not to de-list Nikko's shares as punishment for breaking accounting regulations. Speaking at a press conference in Tokyo, exchange chief Taizo Nishimuro said that an investigation hadn't found evidence of systematic problems or intentional accounting manipulation that warranted a de-listing. "We couldn't confirm that Nikko Cordial as a whole company was involved," Nishimuro said.

If the de-listing had happened, as many expected, many Japanese fund managers would likely have welcomed the chance to bail out at whatever price they can get because of agreements with clients to only invest in listed companies. Now, those fund managers may also hold out for a higher price.

For the time being, though, Citi doesn't seem to be having doubts. Following the Tokyo Stock Exchange announcement, Citi said in a statement that it would stick with its original bid.

One reason: More investors will need to rebel to scupper the deal. On announcing the takeover, Citi and Nikko said that Citi would seek to raise its current 4.92% stake to at least 51%, and both sides expressed confidence that the deal would be approved (see, 3/6/07, "Tokyo Comeback: Citi Buys Nikko").

Lone Suitor

Also, Citi's deal remains the only one on the table. Japanese financial group Mizuho (MFG), which will become Japan's fourth-largest brokerage after it merges its business with Shinko Securities, has reportedly decided against making a bid for Nikko. So far, its executives show no signs of changing their minds.

Still, Citi and Nikko shouldn't get complacent: Last month, shareholders in Japan rejected a merger attempt between steelmakers Tokyo Kohtetsu and Osaka Steel, marking the first time a plan approved by the boards of directors of both companies got shot down by investors. Ichigo Asset Management, a fund led by a former Morgan Stanley (MS) banker, urged investors to block the transaction because the proposed share swap didn't give Kohtetsu shareholders a sufficient premium.

Speaking ahead of the developments on Mar. 12, Shinsei's Matsumoto noted that Citi would be wise to boost its bid rather than rely on the TSE to help its cause. "Citigroup should quicken the buying process to take away anxiety among Nikko's customers and employees…by raising the bid." That advice now looks even more prescient.

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