Citigroup wins control of Japan's Nikko Cordial

By Jonathan Soble and Mark McSherry

TOKYO/NEW YORK (Reuters) - Citigroup cemented its biggest-ever Asian acquisition for $7.7 billion after a majority of shareholders in Japanese brokerage Nikko Cordial Corp. accepted a buyout offer.

Citigroup said it secured 61 percent of Nikko's voting stock in a tender bid that expired on Thursday. The takeover is its biggest under Chief Executive Charles Prince and its second-biggest outside the United States.

A group of investment firms with large stakes in Nikko had rejected Citigroup's offer of 1,700 yen a share. Although they failed to rally enough smaller investors to block the bid, they could still cause headaches as significant minority owners.

Citigroup said it was considering buying more Nikko shares and may seek to make Japan's third-biggest brokerage a wholly owned subsidiary, comments that sent Nikko's stock up 2.8 percent to close at 1,738 yen.

"They need two-thirds so they can head off any potential veto move," said Masaki Iso, chief investment officer at Yasuda Asset Management. "The market is naturally thinking that they might offer a little bit of a premium for a few more shares to get some of the pressure from those funds off their back."

Citigroup had offered to buy all Nikko shares tendered and was seeking a minimum 50 percent stake. The takeover values all of Nikko at $14 billion.

"The opportunity to penetrate the second-wealthiest economy in the world ... puts Citigroup in a very strong and positive situation," said Richard Bove, a bank analyst at Punk Ziegel & Co. "I think it's going to be a home run for Citigroup."

But with the bank under pressure from investors to cut costs and streamline its business, CEO Prince could face pressure to make the acquisition pay off quickly.

"Chuck Prince is spending a big amount of money and it gives them exposure in Japan -- but what does it actually add to the bottom line?" said William Smith, chief executive of SAM Advisors LLC, a Citigroup shareholder.

Nikko has 109 branches and 26.8 trillion yen ($226 billion) of retail assets under management. It earned net profits of 78.12 billion yen in the business year ended March 31, down 11 percent from the previous year.

Citigroup launched its buyout bid last month after Nikko was rocked by an accounting scandal, which hurt business at core retail unit Nikko Cordial Securities and Nikko Citigroup Ltd., the companies' eight-year-old investment banking joint venture.

Management at Nikko endorsed the takeover, which is the biggest-ever foreign buyout of a Japanese company.

Citigroup had first offered 1,350 yen a share for Nikko, but raised the bid to 1,700 yen after the brokerage escaped a threatened delisting by the Tokyo Stock Exchange over its accounting mess.

The increase was enough to secure majority control, though it failed to win over the objecting investment firms and left Citigroup with less than the two-thirds stake needed to insulate its decisions against minority hold-outs.

Orbis Investment Management, Southeastern Asset Management and Harris Associates had said ahead of the offer's close that they would not tender their stakes, which together amount to about 17 percent of Nikko. A fourth big investor, Canada's Mackenzie Financial, declined to comment.