The handwriting on Citigroup's wall: didn't anyone bother to read it?
Despite subprime woes, Citigroup firms up Nikko buyout
By Kenneth Maxwell
Last update: 7:07 a.m. EST Jan. 18, 2008
TOKYO (MarketWatch) -- Fresh from raising $12.5 billion in new capital to help it cure a subprime loans hangover in the U.S., Citigroup Inc. (C:5.76, +1.99, +52.8%) Friday plowed ahead with plans to buy out minorities in its Japanese brokerage unit Nikko Cordial Corp. (8603.TO), in a share swap deal worth $5 billion.
Citigroup confirmed it will pay Nikko Cordial shareholders the equivalent of Y1,700 of its stock for each Nikko share they own. Working out at 0.602 Citi share for each Nikko share, that overall headline price per Nikko share is in line with plans Citi announced for its 68%-owned Japanese brokerage Nov. 14.
The move does remove some doubts about the New York-based bank's overseas strategy as it seeks to fix subprime-related problems. But a slide in Citigroup's share price brought on by those subprime woes since the deal was first agreed means the U.S. bank now has to pay more in its own stock for each share in Nikko than originally intended.
Based on its volume weighted average price on the New York Stock Exchange from Jan. 15 to Jan. 17, Citigroup said the average price it used to set the share swap ratio was $26.35. When it signed the deal to buy out Nikko minorities late October last year, Citi shares were some 37% higher.
Still, at least investors know the deal is now guaranteed to take place. It could have been called off if the average Citigroup share price had fallen below $22 during the swap-setting window. With Citi's stock under pressure as it reported Jan. 15 it lost $9.8 billion in the fourth quarter after booking some $18 billion in write-downs and credit costs, a collapse of the Nikko swap deal was far from impossible.
Citigroup's future strategy and its share price moves have become a focus of increasing concern for Nikko's minority shareholders. The U.S. bank paid over $10 billion to buy its controlling stake early in 2007, with plans to develop its retail network and reel in Japan's traditionally thrifty savers with some $13 trillion salted away in personal assets, much of it in low-yielding bank accounts.
But after Citi became sucked into the subprime lending turmoil late last year, its own value slumped and its top banker, Charles Prince, stepped down from the post of chief executive officer, leaving some Nikko minority holders wondering if shares in the U.S. bank under the agreed terms represented the best value.
Some investors openly questioned the plan at a December meeting called to rubber-stamp the deal, describing the Y1,700 offer value as low and querying the validity of Citi's ambitions in a country where cultural differences can hamper foreign firms' progress.
Citi's top banker in Japan, Douglas Peterson, brushed off those concerns at the time, saying "Citi has had a presence in Japan for over 100 years and a partnership with Nikko for the last nine years." Paterson said the group will continue to respect Japan's culture and corporate governance while investing more in the Japanese market and Nikko to build a business platform.
Nikko shares ended down 3.8% at Y1,606 on the Tokyo Stock Exchange Friday as it lost ground in the wake of Citigroup's troubles this week. In a hectic trading session, the Nikkei index of Tokyo's blue chips ended the day 0.6% higher.
By Kenneth Maxwell
Last update: 7:07 a.m. EST Jan. 18, 2008
TOKYO (MarketWatch) -- Fresh from raising $12.5 billion in new capital to help it cure a subprime loans hangover in the U.S., Citigroup Inc. (C:5.76, +1.99, +52.8%) Friday plowed ahead with plans to buy out minorities in its Japanese brokerage unit Nikko Cordial Corp. (8603.TO), in a share swap deal worth $5 billion.
Citigroup confirmed it will pay Nikko Cordial shareholders the equivalent of Y1,700 of its stock for each Nikko share they own. Working out at 0.602 Citi share for each Nikko share, that overall headline price per Nikko share is in line with plans Citi announced for its 68%-owned Japanese brokerage Nov. 14.
The move does remove some doubts about the New York-based bank's overseas strategy as it seeks to fix subprime-related problems. But a slide in Citigroup's share price brought on by those subprime woes since the deal was first agreed means the U.S. bank now has to pay more in its own stock for each share in Nikko than originally intended.
Based on its volume weighted average price on the New York Stock Exchange from Jan. 15 to Jan. 17, Citigroup said the average price it used to set the share swap ratio was $26.35. When it signed the deal to buy out Nikko minorities late October last year, Citi shares were some 37% higher.
Still, at least investors know the deal is now guaranteed to take place. It could have been called off if the average Citigroup share price had fallen below $22 during the swap-setting window. With Citi's stock under pressure as it reported Jan. 15 it lost $9.8 billion in the fourth quarter after booking some $18 billion in write-downs and credit costs, a collapse of the Nikko swap deal was far from impossible.
Citigroup's future strategy and its share price moves have become a focus of increasing concern for Nikko's minority shareholders. The U.S. bank paid over $10 billion to buy its controlling stake early in 2007, with plans to develop its retail network and reel in Japan's traditionally thrifty savers with some $13 trillion salted away in personal assets, much of it in low-yielding bank accounts.
But after Citi became sucked into the subprime lending turmoil late last year, its own value slumped and its top banker, Charles Prince, stepped down from the post of chief executive officer, leaving some Nikko minority holders wondering if shares in the U.S. bank under the agreed terms represented the best value.
Some investors openly questioned the plan at a December meeting called to rubber-stamp the deal, describing the Y1,700 offer value as low and querying the validity of Citi's ambitions in a country where cultural differences can hamper foreign firms' progress.
Citi's top banker in Japan, Douglas Peterson, brushed off those concerns at the time, saying "Citi has had a presence in Japan for over 100 years and a partnership with Nikko for the last nine years." Paterson said the group will continue to respect Japan's culture and corporate governance while investing more in the Japanese market and Nikko to build a business platform.
Nikko shares ended down 3.8% at Y1,606 on the Tokyo Stock Exchange Friday as it lost ground in the wake of Citigroup's troubles this week. In a hectic trading session, the Nikkei index of Tokyo's blue chips ended the day 0.6% higher.
Views: 27
Replies to This Discussion
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Permalink Reply by Antsu-in-Japan on
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I think so... What are your thoughts on this?
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Permalink Reply by sesport on
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I think the first paragraph says it all. Citi has begged US taxpayers to bail them out of US subprime mess, yet swap shares with Nikko? Where's Citi going with our money?
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Permalink Reply by Antsu-in-Japan on
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Yep...bad business deals. Yet we are expected, once again, to bail them out of their
mistakesmismanagement practices! When I said we should let them fail in another post, I was told that it's not that simple. Yes, it is. Heck, the US government can just refuse to cover their butts...VERY simple. The outcome surely won't be pretty but you'd better believe it'll be years before people allow their businesses (if they still exist) to fall into such chaos again. These companies are big boys...let them take responsibility for and fix their own problems.
Frankly, bailing out all these companies has opened a can of worms. Who's next to beg for a loan? Who decides which companies get what? Most importantly, are these companies that are being bailed out learning any worthwhile lessons from the experience or do they just assume that taxpayer money will be there for their benefit the next recession that rolls around...? -
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Permalink Reply by sesport on
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Funny thing is that the dateline for that article is almost a year old. It almost reminds me of the "check kiting" that Americans get prosecuted for doing. Citi swapped Nikko with a "bad check" (Citi shares) in return for a Nikko check (shares), now Nikko owns the devalued shares, but Citi has their foot in the door with Nikko "while investing more in the Japanese market." Wonder what kind of bonus Mr. Peterson will be getting this year? Or will he be bound by the restrictions placed on Citi for the bailout of no bonus and one cent dividend per share?
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Permalink Reply by Antsu-in-Japan on
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Yep, the foot may be in the door BUT I think Japanese businesses will have no problem slamming that door shut (foot and all) when this is all said and done. It's hard enough for a Japanese business to regain respect and trust here after getting caught in something of this magnitude. I doubt a foreign company (regardless of its investment in Japanese markets) can get off without any repercussions from something like this. The Japanese are VERY subtle when cutting ties, especially in business... but you can believe that they will be cut. Citigroup has lost MUCH face, especially considering the "meiwaku" (trouble) it has caused for those connected to it.
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Permalink Reply by sesport on
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LOL, I believe the Ninja & Samauri already are set loose on Mr. Peterson, who I've no doubt has already returned to US soil. Do you think Japanese will let Nikko go down?
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Permalink Reply by Antsu-in-Japan on
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Too funny!! They probably flew him back first class. I wonder if he is still in the country...?
I'm not sure if Nikko will go down...it definitely doesn't look good. Unlike the US, we also use the Japanese Postal system (which has now been privatized) for banking. Also, Mizuho is the top private banker in Japan from what I understand. The NikkoCiti group was ranked 3rd...at least before this chaos struck! Not sure now.
I read somewhere that it has 111 branches throughout Japan. Never seen any in my state. -
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Permalink Reply by Antsu-in-Japan on
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Oh yeah forgot to mention....the country's lottery system (not run by individual states) is linked to Mizuho Bank. By the way, we don't pay ANY taxes on our winnings. Cool huh!
http://www.takarakuji.mizuhobank.co.jp/ -
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Permalink Reply by Antsu-in-Japan on
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I still remember that economic crisis! Guess we would have noticed this coming if we had only looked a little bit closer.
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