Investors rush to buy Nikko after Citi raises bid

TOKYO, Mar 14 (Reuters) Investors rushed to buy shares in Nikko Cordial Corp. on Wednesday despite a tumbling Tokyo market after Citigroup sweetened its takeover bid for the brokerage by 26 percent to more than billion.

After the market close, Citigroup said that its tender offer for all shares in Japan's third-biggest brokerage would start on Thursday and run for 30 working days.

Shares in Nikko had gone untraded all day due to a flood of buy orders, before closing at 1,690 yen, up from Tuesday by their daily limit of 200 yen, or 13.4 percent. The benchmark Nikkei 225 closed down 2.92 percent.

On Thursday the daily limit for Nikko shares will expand to 300 yen, giving a price ceiling of 1,990 yen.

Nikko's closing price was just below Citigroup's new bid of 1,700 yen a share, unveiled on Tuesday. The U.S. bank raised its offer from 1,350 yen on Tuesday after the brokerage's value was boosted by a decision by the Tokyo Stock Exchange not to revoke Nikko's share listing over an accounting scandal.

Hiroyuki Maekawa, a brokerage analyst at Deutsche Bank, said the raised offer fell within his fair-value range of roughly 1,400-2,100 yen and seemed to be ''a demonstration of Citigroup's determination to acquire Nikko Cordial''.

''We anticipate that a rise in the share price above 1,700 yen could prompt changes in Citigroup's and Nikko's plans, including another increase in the offer price, a lowering of the target number of acquired shares, or withdrawal of the offer,'' he said in a note to clients.

Citigroup is offering to buy all Nikko shares tendered and is aiming for a minimum of 50 percent. The bank already holds a stake of just under 5 percent, and buying the rest of Nikko would cost 1.578 trillion yen (.58 billion).

Goldman Sachs raised its rating on Nikko's shares to ''buy'' from ''neutral'' and hiked its 12-month price target to Citigroup's bid level of 1,700 yen from 1,200 yen. Lehman Brothers raised its rating to ''overweight'' from ''equal weight'' and upped its target to 2,100 yen from 1,350 yen.

''Some of Nikko's major shareholders may not agree to the takeover,'' Goldman analyst Takehito Yamanaka said. ''There is a possibility that Citigroup could raise its offer price further, but we believe the likelihood has decreased in comparison with the time of the last announcement.'' Citigroup raised its offer after the stock exchange's surprise ruling weakened its leverage against a group of large North American shareholders who dismissed its initial offer as too low.

Even before the bourse's decision, four 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.

Those firms did not return calls after Citigroup announced its new price on Tuesday.

The new offer still falls short of the 2,000 yen a share demanded by most of the funds. But it is in line with the valuation of Nikko's peers at more than two times book value per share, according to Dalton Investments, another U.S. fund that also owns Nikko shares.

Citigroup's willingness to pay more for Nikko, already its biggest Asian acquisition target, underscored its determination to increase its foreign business and tap into Japan's expanding asset management market.

Citigroup had insisted as late as Monday it would stick with its original offer, but in the end it faced a stark choice: raise its bid or give up on a deal it 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 Tokyo bourse had reviewed Nikko's listing after the firm admitted that managers at its merchant banking unit had forged documents as part of an effort to inflate profits from an acquisition. The brokerage has paid a .3 million fine and top executives, including its former president, have resigned.

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