Citigroup raised its offer for Nikko Cordial Corp. by 26 percent to $13.4 billion on Tuesday after a decision by the Tokyo Stock Exchange not to revoke the brokerage’s listing sharply boosted its value.
Citigroup’s move came a day after the exchange’s surprise ruling weakened the U.S. bank’s leverage against a group of large North American shareholders who had dismissed its initial offer as too low.
Its willingness to pay more for Nikko, already its biggest Asian acquisition target, underscored its determination to grow its foreign business and tap into Japan’s expanding asset management market.
“It shows Citigroup really wants the ownership,” said Naoko Nemoto, a bank analyst at credit rating agency Standard & Poor’s. “Investors might have sold at the initial price if the stock was delisted, but with the current situation it would have been hard.”
Citigroup said in a statement it planned to launch a tender offer at 1,700 yen a share, compared with the initial 1,350 yen it had announced last week. It said it would open the tender ”as soon as (is) practicable.”
Its new offer values Nikko at roughly 1.578 trillion yen ($13.43 billion) and gives a premium of 14 percent to Nikko’s closing price on Tuesday.
Even before the stock exchange’s ruling, a group of U.S. and Canadian investment funds that own about 25 percent of Nikko had complained Citigroup’s first offer undervalued the firm by a third or more.
The new offer still falls short of the 2,000 yen a share demanded by most of the funds, suggesting they may keep pressure on the bank to cough up more cash.
Shares in Nikko jumped to more than 10 percent above Citigroup’s original offer price on Tuesday in response to the Tokyo bourse’s decision. They ended at 1,490 yen, up 6 percent from Monday and the highest close since December, when Nikko’s accounting mess prompted the TSE to begin a review of its status.
Natsumu Tsujino, an analyst at JPMorgan, said Nikko’s latest quarterly earnings imply a per-share value of 1,530 yen.
A price tag of 2,000 yen would give Nikko roughly the same ratio of price to book value as its two larger, more profitable rivals, Nomura Holdings Inc. and Daiwa Securities Group Inc., according to Reuters data.
Citigroup had insisted as late as Monday that it would stick to its original offer, but in the end it faced a stark choice: raise its bid or give up on a deal that it had touted as key to its resurgence in Japan, where it has incurred heavy losses in recent years.
Nikko’s management has agreed to the Citigroup deal, which if successful would be the biggest-ever foreign buyout of a Japanese company.
The delisting threat had spooked Nikko’s clients and prompted credit rating agencies to downgrade the firm, dragging its stock to a low of 980 yen before reports of Citigroup’s interest emerged.
Standard & Poor’s said it began a review of Nikko’s credit rating for a possible upgrade on Tuesday. The other global agencies, Moody’s and Fitch, began reconsidering their ratings after Citigroup unveiled its offer.
Nikko escaped delisting. The firm admitted that managers at its merchant banking unit forged documents as part of an effort to inflate profits from an acquisition. The brokerage has paid a $4.3 million fine and top executives including its former president have quit.