Citigroup Inc. is planning to launch a takeover offer for the troubled Japanese brokerage firm, Nikko Cordial Corp., as part of a broader proposed strategic alliance.

Citigroup and Nikko Cordial announced today that they have agreed to form a comprehensive strategic alliance, consisting of a broad-ranging business alliance and a capital alliance in which Citigroup would launch a tender offer for 100% of the firm, with the purpose of becoming Nikko Cordial’s majority shareholder. Citigroup and Nikko Cordial said that their alliance agreement was signed today following approval by their respective boards of directors.

The firms say that they are forming the alliance, “in order to create one of Japan’s leading financial services groups and to enable the combined franchise to pursue important new growth opportunities, giving due respect to Japanese culture and business practices.”

Fitch Ratings said that Citigroup Inc.’s credit ratings will not be impacted by a tender offer for Nikko Cordial. “The potential acquisition of a major stake in Nikko Cordial provides Citigroup an opportunity to capitalize on one of the largest franchises in the Japanese securities business,” it says.

The rating agency notes that Nikko Cordial is facing potential delisting by the Tokyo Stock Exchange following multiple earnings restatements and findings indicating lax internal controls by an independent special council. Business volumes at Nikko Cordial Securities and Nikko Citigroup JV have contracted following publication of these issues.

“The tender offer is designed to protect Citigroup’s 4.9% interest in Nikko Cordial as well as its interests in the investment banking joint venture Nikko-Citigroup which had been operating quite successfully until December 2006,” it adds.

The two firms say that, under the direction of a joint steering committee that will soon be formed to begin implementing the new business alliance, they intend to: create a new alliance between Nikko
Cordial’s retail brokerage business and Citigroup’s retail banking and credit card businesses; expand Nikko Citigroup’s ability to deliver integrated solutions for corporate and institutional clients and expand their joint cross-marketing efforts; identify opportunities for collaboration between Nikko Asset Management and Citigroup in distributing fund products; develop a strategic solution for Nikko Principal Investments; seek efficiencies of scale from combining the technology and administrative support platforms used by Nikko Cordial companies and Citigroup in Japan; develop an overall group organization structure to maximize benefits and efficiencies in business organization, capital usage, and credit ratings; and, to develop the management team that will help lead the combined franchise in Japan.

Citigroup and Nikko Cordial added that significantly expanding their existing alliance would allow them not only to better serve their customers in Japan but also to strengthen their market presence and enhance their ability to grow in the world’s second largest economy.

In order to implement the capital alliance, Citigroup has agreed, subject to certain conditions to launch a tender offer for 100% of Nikko Cordial’s shares at a purchase price of Yen 1,350 per share. Citigroup has also agreed that this tender offer will be launched regardless of whether Nikko Cordial’s shares are delisted. Citigroup expects to be able to launch the tender offer within the next week.

The purchase of Nikko Cordial shares in the tender offer is expected to be accretive for Citigroup. If Citigroup purchases all of Nikko Cordial’s outstanding shares in the tender offer, the total purchase price would be approximately Yen 1.253 trillion.

“Citigroup Inc.’s credit ratings are supported by leading franchises in global corporate and retail banking and good financial performance. Announced acquisitions are in line with its goals of expanding retail businesses and improving operating leverage. Importantly, Citigroup remains committed to the maintenance of strong capital ratios. The integration of Nikko Cordial is an opportunity to improve its market share in Japan in retail businesses. Operations are expected to be immediately accretive,” Fitch comments.