updated 8/24/2004 12:42:26 PM ET 2004-08-24T16:42:26

Sumitomo Mitsui Financial Group Inc. laid out a $29 billion bid for UFJ Holdings on Tuesday, challenging a rival offer by Mitsubishi Tokyo Financial Group to form the world’s biggest bank.

The SMFG offer, which valued UFJ at a 23 percent premium to its closing stock price, puts pressure on MTFG to come up with attractive terms for its own merger plan.

MTFG — UFJ’s preferred merger partner — has not yet said how much it would be willing to pay for UFJ, the smallest and weakest of Japan’s top four banks.

“It seems like a pretty aggressive bid,” Barclays Capital analyst Jason Rogers said of the SMFG offer. “This is more or less a takeover bid as opposed to a merger.”

UFJ said it would consider the SMFG bid with the help of outside consultants, but added that it had no intention of changing its plans to merge with MTFG.

UFJ, more than 30 percent owned by foreign shareholders, could come under pressure from investors to accept SMFG’s offer if MTFG does not trump the SMFG offer.

The rare Japanese takeover battle comes as the banks are trying to clear up years of accumulated bad debts and are seeking new ways to boost profit and reduce dependence corporate lending.

The loser would rank a distant third among Japan’s banks behind the new entity and Mizuho Financial Group

MTFG agreed earlier this month to take over UFJ, which has made a loss for the past three years, in a deal that would create the world’s biggest bank by assets.

SMFG said on Tuesday it would offer one of its shares for every common share of UFJ, valuing UFJ at around 3.2 trillion yen ($29.13 billion) at current share prices, based on 5.09 million UFJ common shares outstanding.

It said the offer would be good for one month.

Analysts have said they expect MTFG to offer 0.3 to 0.5 of its shares for every UFJ share, valuing UFJ at between $14 billion and $24 billion.

An MTFG spokesman said there was no change to its plans to push ahead with the UFJ merger.

“We will continue pushing forward with due diligence to merge with UFJ,” a MTFG spokesman said. He declined to comment on the timing of any announcement of a merger ratio.

In MTFG's court
Rogers said the pressure was now on MTFG to come up with good terms, though it may benefit if SMFG’s offer is judged too generous.

The bid is almost 10 times UFJ’s projected net profit for the year to March 2005. UFJ has some 4.62 trillion yen in bad loans as of the end of June, the largest burden of the top four banking groups.

“The big risk here is if investors think Sumitomo Mitsui is offering too much,” he said, adding investors could end up selling shares in both SMFG and UFJ, paving the way for MTFG to pick up UFJ shares more cheaply.

MTFG has said it would inject up to 700 billion yen into UFJ, which needs more capital for its plan to deal with the bulk of its bad loans by the end of September.

That figure was 200 billion yen more than SMFG’s first formal proposal last month.

SMFG at that time offered more than 500 billion yen in capital and projected annual cost savings of 200 billion yen for the merged entity.

SMFG said on Tuesday it could offer UFJ 700 billion yen in capital if needed.

“We believe our offer is better than MTFG’s because of our merger ratio and the expected benefits from our merger,” said SMFG spokesman Takashi Morita.

The deal eclipses the $25 billion Japan’s Sumitomo Bank, now part of SMFG, paid for Sakura Bank in 1999, according to financial industry analyst Dealogic.

By comparison, J.P. Morgan Chase & Co. paid $58.2 billion for Bank One Corp. earlier this year.

An MTFG-UFJ entity would create the world’s top-ranked bank with assets of $1.7 trillion, while an SMFG-UFJ combination would command assets of $1.6 trillion — also bigger than current world number one Citigroup, which has assets of $1.3 trillion.

The merger talks between MTFG and UFJ still face a possible hurdle as Sumitomo Trust & Banking plans to challenge in the supreme court a lower court’s ruling allowing on the inclusion of UFJ’s lucrative trust bank unit in the MTFG merger.

UFJ had previously agreed to sell its trust bank to Sumitomo Trust as part of a plan to get its balance sheet back in shape. But it canceled that deal when it turned to MTFG, prompting legal action by Sumitomo Trust.

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