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Citi Still Globetrotting

Prince shuns calls for domestic deals in favor of a bid in Japan.


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CEO Chuck Prince is sticking with his international expansion plan.

The nation's largest bank said Tuesday it intends to become the majority shareholder of Japanese brokerage firm, Nikko Cordial.

Citi plans to buy Nikko's shares for $10.8 billion in a tender offer starting next week. Citi already owns 4.9% of Nikko Cordial and has a joint venture with the firm to provide investment banking services in the country under the name Nikko Citigroup. The tender offer is conditioned on Citi's getting at least half of shares in Nikko.

Wall Street has been hammering Prince for Citi's domestic shortcomings, but Tuesday's announcement shows he remains focused on international opportunities.

The deal provides Citi with opportunities to cross-sell Nikko's retail brokerage customers. Citi says it can offer customers retail banking, investment banking, and private equity and asset management businesses in Japan. Nikko has 109 retail branches in Japan.

But the deal does not come without its problems. Last December, Nikko revealed it would have to restate profits for its past two fiscal years because it had booked profits inappropriately from derivatives transactions. It was fined more than $4 million last year by Japanese regulators. The Tokyo Stock Exchange is reviewing whether to delist Nikko.

Citi has had its own problems in Japan.

In 2004, Citi's private banking arm in Japan was virtually shut down after regulators alleged it misled customers, financed stock manipulation and kept shoddy records. Citi has apologized for its actions.

Two months ago, Citi announced that due to changes in Japan's operating environment and its consumer lending laws, it is closing 85% of its 320 loan offices in the country. Citi recorded a loss for those operations in the fourth quarter.

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Prince has made several top management changes recently. Last week Citi hired

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veteran Gary Crittenden as its new CFO.

Investors seemed pleased with the offer. Shares of Citi were up $1.14, or 2.3%, to $50.39 on Tuesday.

Citi is "doing the Japanese government a huge favor by buying Nikko Cordial when it is a disgrace," writes Dick Bove, an analyst at Punk Ziegel. "By helping the Japanese at this time, Citigroup may reverse what has been five years of contentious relationship with the Japanese government."

Joe Dickerson, an analyst in London at Atlantic Equities, says the deal makes sense.

Citi can get these "damaged goods" at a "much more attractive price," he says. The multiple Citi is paying for Nikko is "much less than they would pay for a U.S. bank." The operating environment is tough in the U.S. these days between an inverted yield curve and increasing credit problems, he adds.

Dickerson estimates in a research note that if Citi is successful in acquiring the broker, it would pay 1.6 times book value and 13.4 times Nikko's earnings last year -- compared with an estimated minimum of 3 times book value and 17 to 19 times earnings for a U.S. bank.

But Dickerson wonders whether Citi will be able to cross-sell the brokerage services to retail banking customers in Japan.

"They haven't really done that in other parts of their business," Dickerson says. While cross-selling brokerage services through Smith Barney to mortgage customers has worked, "Smith Barney has not done a very good job at leveraging Citi's retail bank."