UPDATE 1-Citigroup in talks to sell Nikko Antfactory-sources

Wed Apr 23, 2008 8:20am EDT

(adds details, background)

By Alison Tudor and David Dolan

TOKYO, April 23 (Reuters) - Citigroup Inc (C.N) is in talks to sell a private equity unit in Japan, Nikko Antfactory, as it seeks to comply with U.S. banking laws and raise cash to shore up its balance sheet against market turmoil, sources with direct knowledge of the matter said.

Citigroup (8710.T) boosted its presence in Japan earlier this year by buying Japanese brokerage Nikko Cordial and listing on the Tokyo bourse.

The U.S. financial giant is now in the midst of reorganising its presence in the world's second-largest economy which includes deciding the fate of Nikko Cordial's private equity activities.

The sale of Nikko Antfactory is mainly being driven by U.S. banking law which limits a financial group's control over a non-financial firm, the sources said. This means a private equity firm owned by Citigroup might be hamstrung when trying to turnaround a portfolio company.

Nikko Antfactory specialises in small private equity investments, including buyouts and venture capital deals. It can also purchase the equity held by institutional investors, companies or venture capital firms who wish to sell out

To better manage its investments, Nikko Antfactory could be transferred to another Citigroup affiliate, but the sources said it is more likely that Nikko Cordial would sell its shares in the unit to a Japanese financial institution.

A sale would come at a fortuitous time for Citigroup, the largest U.S. bank, which has recorded more than $46 billion in write-downs and credit losses since the mid-2007 when turmoil in financial markets became headline news. Citigroup's shares have more than halved in the last 12 months.

But the sale of Nikko Antfactory would add a relatively small amount to Citigroup's capital raising drive, which has drummed up more than $36 billion since November.

Since Citigroup acquired Nikko Cordial it has already put the British and Australian units of merchant banking business, Nikko Principal Investments, up for sale, separate sources have previously told Reuters.

Nikko Antfactory executives also support sponsorship by a third party, the sources said, as working under the umbrella of a respected domestic institution would help them win business in Japan. This is an especially important consideration in conservative Japan where referrals and appearances count.

Nikko Antfactory has about $1.3 billion worth of investments under its wing and capital already committed to it by investors.

INSIDE THE ANT HILL

A decision on the future ownership structure of Nikko Antfactory may be made in the next couple of months as it is keen to raise more money. It has about $250 million in hand but its annual investment rate runs at around $150-200 million, the sources told Reuters.

The wheels have already been set in motion for another round of fund raising. Nikko Antfactory is looking to raise about $70-80 million for a secondary fund and $80-100 million for its fourth private equity fund, the sources added.

Established in 2000, Nikko Antfactory has bought into companies such as Virgin Cinemas Japan, a multiplex cinema later sold to Toho Co (9602.T). It recently invested in Bookoff (3313.T), a Japanese retailer of second-hand books.

Nikko Antfactory has about 100 employees around the world including around 65 investment professionals.

The Tokyo-based firm focuses on its home market, Japan, but is also keen to expand into Asia. The firm already has a hub in Singapore to help foreign investors buy into its funds in a tax efficient way.

Nikko Antfactory executives are also monitoring developments in China and deciding how best to participate in the growing economy of the Middle Kingdom. The firm plans to spend about half of its new secondary fund in Asia and half in Japan, the sources said.

Nikko Cordial and Citigroup declined to comment.

(Additional reporting by Emi Emoto)

(Editing by Richard Hubbard)