Citi seen waiting in wings as TSE debates Nikko's fate

By Jonathan Soble

TOKYO (Reuters) - As the Tokyo Stock Exchange deliberates whether to delist Nikko Cordial Corp. 8603.T over an accounting scandal, bankers are keeping a sharp eye on the brokerage's most likely suitor -- U.S. financial conglomerate Citigroup (C.N).

Should the TSE decide next month to revoke Nikko's share listing -- a decision that bankers and analysts say is too close to call -- Citigroup is increasingly expected to scoop up its smaller investment banking partner.

"Citi is champing at the bit," said an executive at a major Japanese bank.

The U.S. lender has worked hard to patch up a rift with Japanese regulators and may be the only potential Nikko buyer with enough cash to keep it out of a liquidity crisis if it is delisted.

Citigroup owns about 5 percent of Nikko, whose market value is just under $10 billion, after bailing it out during Japan's late-1990s financial crisis. The two companies also share control of Nikko Citigroup, Japan's third-biggest investment bank.

The TSE put Nikko on review for possible delisting in December for falsifying documents and booking about $150 million in illegitimate profit at its merchant banking business.

Citigroup fueled speculation about a possible Nikko buyout last month when it said it would establish a Japanese holding company, a move that would make acquisitions easier.

"Citi has said it wants to earn more revenue internationally, so it's possible they could buy the rest of Nikko Cordial," said Helena Ocampo, an analyst at Sentinel Asset Management in Montpelier, Vermont, which owns Citigroup shares.

One concern would be regulators' response to any Citigroup bid, she said. But the U.S. bank has made progress on that score after authorities ordered its Japanese private banking business to close in 2004 for a raft of violations including loose controls against money laundering.

Citigroup Chief Executive Charles Prince, who took over after the private banking scandal, has quietly visited Tokyo three or four times a year to try to smooth things over with the Financial Services Agency, a senior FSA official said.

"He's very earnest," he said. "I think he's a trustworthy man who understands what regulators think and how to deal with us."

Citigroup itself has been quiet about its plans, and its representatives in Tokyo have declined to comment.

"There has been some negative impact on the joint venture because of the publicity and so forth around Nikko Cordial, and in terms of our ownership, I think that's something that we're going to have to continue to study," Prince said last month.

RIVAL BIDDERS?

Citigroup could face a rival bid from Japan's second-biggest bank, Mizuho Financial Group (8411.T), which owns about 5 percent of Nikko Cordial. Hiroshi Saito, the aggressive head of Mizuho's corporate lending arm, has said he would be open to requests from Nikko for financial aid.