Just weeks after taking control of Fullerton India Credit, Sumitomo Mitsui Financial Group has shown a further example of its international ambitions by taking a stake in Jefferies and striking a strategic alliance with the US-based investment bank.
Sumitomo Mitsui – known at the group level as SMBC, though more commonly referred to by analysts as SMFG – will take a 4.9% stake in the firm, worth $386 million, based on the Jefferies closing price of July 13.
An announcement on July 14 said the alliance was “to collaborate on future corporate and investment banking business opportunities”. The statement specifically mentions US leveraged finance, cross-border M&A involving Japanese companies, and US healthcare.
The heart of the idea is to combine SMBC’s balance sheet and Jefferies’ international reach in investment banking.
This is not just a conceptual ambition: the announcement comes with a $1.65 billion revolving credit facility and $250 million subordinated loan from SMBC to the leveraged finance underwriting affiliate of Jefferies, as well as an additional $350 million revolving credit facility to Jefferies more broadly.
The two institutions have a relationship going back at least 10 years, particularly in equity trading in Japan and the US. The credit line reflects SMBC’s trust that Jefferies can do a lot more with that money than SMBC itself can.
Take New York
From the Japanese lender’s perspective, it is starting to look more and more like rival Mitsubishi UFJ Financial Group (MUFG). We commented following the Fullerton India deal that SMBC had now successfully rolled out chief executive Jun Ohta’s plan to gain exposure to high-growth Asian economies in Vietnam, the Philippines in India, with stakes in FE Credit, RCBC and Fullerton India Credit respectively, in an effort to combat low-to-negative growth at home.
Taking on New York, though, is something new.
MUFG has a considerable US presence through two channels: its ownership of Union Bank and its stake in and partnership with Morgan Stanley. The US is vital to the bank, and its chief executive, Kanetsugu Mike, twice worked in New York, once as regional executive for the Americas.
The low-hanging fruit will be cross-border M&A involving Japan, which is plentiful
Mizuho has also put great effort into building a US securities presence, with some success.
Nomura and Daiwa, not megabanks but wealth and investment banking businesses, are also active in the US.
“All the megabanks have securities businesses, and right away the US is half of the global fee pool in securities,” says Michael Makdad, analyst for Morningstar in Tokyo. “But SMFG, while strong in retail, is lacking on the institutional side, especially overseas. If SMFG were to try to build that scale themselves by hiring bankers, they would likely not succeed. Definitely, tying up with Jefferies is a much better way to go.”
Rich Handler, Jefferies’ chief executive, says the alliance “will further our already robust investment banking and capital markets capabilities”, while Ohta says it will “help accelerate the growth of the corporate and investment banking businesses of both institutions.”
The low-hanging fruit will be cross-border M&A involving Japan, which is plentiful for two reasons: the need for Japanese companies to go overseas to seek growth, just as SMBC itself has done; and the surfeit of international private equity firms coming into Japan to buy non-core assets from streamlining conglomerates.
Boom time
Jefferies was, of course, its own financial adviser on this deal, though Citi advised SMBC; in future, Jefferies will hope to get mandates for SMBC clients. Jefferies will also hope the deal bolsters its ambitions in Asia, characterised by a hiring spree in Australia and Hong Kong in recent years.
If anything, it is a shame this didn’t happen earlier. In June, Jefferies reported a 148% increase in pre-tax profit for the second quarter year on year, a clear illustration of the boom in investment banking that followed the early days of the pandemic.
SMBC, whose most recent results on May 14 showed a ¥191.1 billion year-on-year decline in profit attributable to owners of parent, the standard Japanese metric for net profit, could have done with some exposure to that corporate finance bonanza.
But this isn’t a deal for the short term, and it would have been difficult to get a deal like this away a year ago, with all the other distractions at the time.
Certainly a deal would have been cheaper then, but SMBC is arguably the best-capitalised of the megabanks and has surplus funds to bring to bear, even after meeting local expectations of a dividend.
MUFG’s partnership with Morgan Stanley has been an unarguable, and somewhat surprising, success. In MUFG’s 2020 financial year, to March 31 2021, Morgan Stanley accounted for 38% of group net profits – and that’s just through the shareholding. The arrangement pays off in investment banking, wealth management and top-level strategic dialogue.
No doubt Ohta and SMBC Nikko chief executive Yuichiro Kondo will be looking closely at that model and hoping they can build something similar with Jefferies.
“Jefferies is a smaller firm than Morgan Stanley, and a 5% stake is not the same as MUFG being Morgan Stanley’s biggest shareholder and having a significant role on the board,” says Makdad. “So it is not of the same scale and it would be ambitious to hope for the same thing to happen. But hopefully it can be successful.”
