Japan: Citi buys troubled local broker

Citi announced on October 2 that it would acquire the remaining shares in broker Nikko Cordial that it does not already own to make the company a wholly owned subsidiary. The move marks the first usage by a foreign firm of the new triangular merger legislation, which allows firms to use their shares rather than cash to make acquisitions and which has been available since May after a ban on the practice was rescinded.

The news has striking implications for the Japanese financial system. Most important, the marriage of an international firm of Citi’s size and a local broker with an established retail platform – Citibank has just 30 branches and sub-branches in Japan – creates a sizeable threat to both the megabanks and the newly created Japan Post bank, all of which will be aggressively targeting the estimated ¥1,500 trillion ($13 trillion) in Japanese household financial assets. The much vaunted switch from savings to investments that will come as Japan’s wealthy baby boomers retire is seen by politicians and banks as crucial to the revitalization of the country’s financial markets.

First of all, though, Citigroup Japan Holdings, the kabushiki kaisha (joint stock company) that owns Nikko Cordial and securities joint venture Nikko Citigroup, will have to work in conjunction with its new acquisition to rebuild investor faith. Nikko Cordial went through a torrid time before Citi’s announcement: on December 18 2006 the broker issued a restatement of its accounts for financial years 2005 and 2006 after discovering accounting practices described in a press release as "inappropriate". A response from the authorities came on the same day: the SEC recommended a ¥500 million fine, and the Tokyo, Osaka and Nagoya exchanges all put the company’s stock on supervisory watch with a view to possible delisting.

Fair exchange

Although by March the exchanges had all decided not to delist Nikko Cordial, the firm will now be removed from exchanges as part of Citi’s acquisition process. Investors are to be given ¥1,700 of Citi stock for each share they own, a swap that they might view with some suspicion given the recent performance of Citigroup Inc on the NYSE. In late October the stock was trading at $42.61, just up from a year-to-date low and well below the 52-week high of $57.

One aspect of the deal not much remarked on in local coverage was Nikko Cordial’s choice of adviser: the specialist, independent advisory firm GCA. The firm, founded in 2004, is justified in regarding the mandate for the $7.9 billion deal as something of a coup. It propels GCA up the Dealogic league table, placing the firm third on the table for announced M&A for the first nine months of 2007 – ahead of all the foreign investment banks and behind only Japanese firms Mizuho and Nomura.