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.