UPDATE 5-Nikko shares plunge 15 percent on delisting report

(Adds comments from Moody's, fund manager)

By Jonathan Soble

TOKYO Feb 28 (Reuters) - Shares in Japan's Nikko Cordial Corp. 8603.T plunged 15 percent on Wednesday after the Nikkei business daily said the brokerage was likely to lose its stock listing over an accounting scandal.

The Tokyo Stock Exchange is making final preparations to delist Nikko after judging that its accounting manipulation -- Nikko has admitted falsifying documents and booking almost $300 million in excess profit over two years -- was "systemic" and "malicious", the newspaper said.

A delisting would restrict Japan's third-biggest securities firm's access to capital and further hurt its reputation and even its credit ratings. It could also open the way for a buyout by Citigroup (C.N), which owns just under 5 percent of Nikko and is in talks to provide financial support.

"Continued uncertainty over the future of the firm can only have a negative impact on business," said Moody's credit rating agency, which cut Nikko's debt rating on Jan. 31. "A delisting, without any strong support from an outside bank, could lead to a further downgrade."

Investors had bid up Nikko's shares on Monday on news that Citigroup was eyeing a bigger stake, but the spectre of a delisting prompted a sharp reversal.

On Wednesday the stock opened down by its daily limit of 200 yen at 1,147 yen, or 14.85 percent below its closing price on Tuesday. It stayed at or near that price throughout the day and closed at the same level.

Sources told Reuters on Saturday that Citigroup was in talks to increase its stake in Nikko to at least 33.3 percent in a potential $3 billion deal that would mark its resurgence in Japan after years of retrenchment.

The U.S. bank has declined to comment, but is widely expected to seek an even larger stake if Nikko is delisted, possibly launching a bid for the whole firm, which has a current market value of about $9.5 billion.

Citigroup could now face increased pressure to make its intentions clear. The TSE has said it will make its final decision on Nikko's listing in mid-March, but if the U.S. bank waits too long it could be checked by potential rivals such as Mizuho Financial Group (8411.T), which also owns about 5 percent of Nikko.

Clients and staff could also abandon the firm, analysts said, and private equity funds might even make a grab for Nikko's assets, such as its profitable mutual fund business and companies held by its merchant banking arm.

"Waiting for the delisting to become official would allow Citi to get the lowest price, but given the risks it's better off moving before that," said one Tokyo-based financial analyst who asked not to be named.

CORPORATE VALUE

Six analysts surveyed by Reuters Estimates before Wednesday's newspaper report valued Nikko at 1,450 yen per share on average. The stock has traded between 1,491 yen just before the scandal broke in mid-December and a low of 984 yen on Feb. 1.

Junichi Misawa, a senior fund manager at STB Asset Management, said speculative buyers may provide a floor for the stock. "If Nikko gets delisted, the stock will likely fall further in the short term, and in that case it may look discounted versus Nikko's corporate value," he said.

The Tokyo bourse said in a statement it had no announcement yet on whether it would delist Nikko, whose status it has been reviewing since the accounting problems emerged. Nikko said it would "announce any important facts that need to be disclosed at the appropriate time."

Mizuho, Japan's second-biggest bank, is also considering offering financial aid but is wary of challenging the larger U.S. lender for control, Mizuho sources have said.

Nikko's shares would be allowed to trade on the TSE for one month after a delisting announcement. After that, investors would only be able to buy and sell the shares in the illiquid over-the-counter market.

The Nikkei said interviews with former Nikko executives had convinced the TSE that Nikko's accounting manipulation was grave enough to have a significant impact on investors, and thus the brokerage meets its criteria for delisting.

The bourse has also been told by several lawyers that delisting would be appropriate and seems to have the green light from the regulatory Financial Services Agency to revoke Nikko's listing, the paper said.

On Tuesday, Nikko said it would seek 3.1 billion yen ($26.2 million) in damages from three executives who resigned over the scandal. It also submitted to the TSE auditor-certified versions of its financial statements, which it has revised twice since December. (Additional reporting by Eriko Amaha and Nathan Layne)